Logos LP is grounded by a balanced philosophy: 'Innovation' and 'Discipline'. The 'Innovation' side of this philosophy suggests considering investments from a perspective which diverges from the norm. For us, this principle consists of viewing potential investments from a unifying and interdisciplinary perspective. As for 'Discipline', we pride ourselves upon a rigorous commitment to our investment strategy. This guiding philosophy or 'vision' allows us to navigate the uncertainty of the financial markets and establish a set of standards or objectives around which to measure performance.
Over the next 6 weeks, my partner and I will explore our vision through a 6 part series covering some of our investment ideas for 2014 on.
Let's get started:
1. Stay long stocks.
Allow me to provide a simple disclaimer: Despite the epic rise in equity premiums over the last year and a half, I think it's very important to point out that value investing is timeless. Regardless of expansionary or recessionary times (even better in recessionary times), finding value (or even wonderful companies at fair prices) allows for amazing cash generation over the long term.
However, investors need to also keep in mind that we are in a bull market and will probably be in one over the next little while. I say this because despite some managers calling out for 'bubbles' or massive collapses on the S&P or MSCI Global Index, people forget how bad the Great Recession really was only a few years back. This is not to say there may not be 'bubble-like' qualities in certain sectors like 'new-media' or biotech (FB, TWTR, LNKD, NFLX, IBB etc.) but the increase in fund inflows, M&A activity, and IPOs should not be a cause of concern for the overall market. Fundamentally, the US, and global economy for that matter, is nowhere near where it should be in terms of growth, innovation, employment and overall government and capital investment.
Let's look at some historical data:
The world's largest economy shrank 4.1% from the fourth quarter of 2007 to the second quarter of 2009. Household spending fell 1.2% in 2009, twice as much as previously projected and the biggest decline since 1942. The data better explains why the jobless rate doubled, reaching a 26-year high of 10.1 percent in October of 2010, and has been slow to subside.
The rebound from the recession was more subdued in the last six months of 2009, as the economy grew at an average 3.3% annual pace from July 2009 through December. By comparison, growth averaged 7.2% in the two quarters following the 1981-82 recession, during which the economy contracted just 2.9%.
Moreover, over the last 5 years, poverty has soared with the number of Americans in poverty increasing to the highest level in more than 50 years that the Census Bureau has been tracking poverty. Over the last 5 years, the number in poverty has increased by nearly 31%, to 49.7 million, with the poverty rate climbing by over 30% to 16.1%. The number of people on food stamps has reached an all-time record high of 47.7 million, up 80% over the past 5 years. From 2008-2013, the economy has grown at an average annual rate of 0.6%, less than one fifth the long term average American growth rate.
While equity premiums have soared, I don't believe we are in a bubble. There is still too much growth on the table, barely any inflation, very high unemployment and trillions of dollars in corporate cash on the sidelines. The recession in 2009 was too deep and is still fresh for millions and millions of people, as we lived through one of the hardest periods since the Great Depression. Thus, I think Yellen will keep her foot on the pedal and although the ride may be a little bit bumpy, markets will continue to rise.
As simple as this idea sounds, I think it is an important one since it allows investors to eliminate excess noise. Furthermore, just because equities have risen does not mean there aren't any opportunities out there. Focus on US industrials that have lagged the broader market over the last few years and that are fundamentally linked to the growth in employment and incomes.