January 2016, See Beyond the Noise

“The question is not what you look at, but what you see.” - Henry David Thoreau

A New Year always brings resolutions to make improvements, as well as predictions about the year ahead. We receive countless economic and market forecasts from large Wall Street firms, including Goldman Sachs, Morgan Stanley and J.P. Morgan Chase. CNBC’s Jim Cramer is never shy about offering his “crystal ball” view of the coming year. These resources typically provide a few relevant points of interest among the various newsletters, presentation materials, and even (although less often) Cramer’s headache producing diatribes.

In essence, as investment professionals, we are inundated with a plethora of data and perspectives that frequently contradict each other. We study the information to make sure we are well informed on different investment views. However, our final analysis is often that, it is mostly just noise. The one common theme across all financial speculation is the time horizon being contemplated by the big investment banks and the financial media is just the next 12-months. One single year is clearly not the most important period of time for investors to consider when following a strategy to generate long-term wealth.

We do carefully consider the impact of the slowing economy in China and we analyze the impact that the sharp drop in the price of oil may have on the earnings and balance sheets of the predominately large U.S. companies we own in our portfolio. However, reflecting on the above quote from the great American author and poet, Henry David Thoreau, we see beyond the current noise and focus on the long-term value that can be created by owning great companies.

The difference for our team is that we constantly ask ourselves the following question: “whether the tangible book value (i.e., net worth) and the earnings growth of the companies we invest in will likely be worth more or less in three-to-five years?” If the answer is more, then we stay invested. We are prone to add to our favorite positions when the irrational financial markets afford us the opportunity to do so at an attractive prices relative to what we view as the true economic value of a company. In addition, the higher dividend yields provided by the vast majority of large-cap multinational companies can create a reliable and even increasing dividend stream.

To illustrate the possibilities available of increasing dividend yields, following are the annual dividend increases from just three positions across our client portfolios:

 

As you can see, there is more to look at than just one person’s forecast on the current financial picture. The power of increasing and compounding dividends can be a material component to the total return of an investment portfolio over time.

Our resolution to see beyond the noise of the fear and panic in the current market environment comes from our core belief that we know what we own and we own what we know.

We have a high level of conviction in the companies in your investment portfolio and regardless of the noise, we “see” opportunities to create long-term value.

Best wishes on a healthy and prosperous year!

 

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