This past July, during the Financial Analysts Seminar, Fred H. Speece Jr., CFA had a candid conversation with John W. Rogers, Jr., Chairman and CEO of Ariel Investments. During this conversation Mr. Speece was asked the question, “What do you think the money management business will look like over the next 10 years?” When Mr. Rogers answered, neither the death of mutual funds, nor the possibility that ETF’s will take over the world was brought up. There was no discussion on Independent Advisors, wire house brokers, or fee-only planners and how they will deliver a service to retirees. There was not a single comment about a bull or bear market, inflation, economics or asset allocation. Instead Mr. Rogers answered, “I have this dream that 10 years from now, the old-fashioned stock picker is going to have by far the best performance coming out of the cycle. I think the performance difference is going to be so large that the investors are going to wake up to the idea that, in the end, it is best to have a solid stock-picking firm with talented, trained people who are passionate about the business.”
Mr. Rogers has been around this business about as many years as me. We both were brought up in a world where our heroes were not a group of economists or academics, but great practitioners of the art of portfolio management. In fact, our hero’s seem to be one in the same including John Neff, Sir John Templeton and Peter Lynch. I am sure, that given the time he would add many others we share to the list. And I believe that these heroes would have one thing in common; they would all share the belief that investment results are dependent upon the growth of the business you own. They have nothing to do with past or expected GDP growth or correlations of returns, and everything to do with how the business you own will produce excess returns on your capital over time.
For those of you who have sold your common stocks and purchased bonds over the past two years I would like you to rethink your strategy. Sure, you can think in terms of the “new normal” or “muddle through” economy as some describe our world today. You can remember the terrible stock market and wonderful bond market over the past decade. But don’t forget the lessons taught by mine and Mr. Roger’s heroes; investment results earned through common stocks have far more to do with the results of the business than the current state of the economy.
That fact is frequently glossed over. According to the Commerce Department, in the third quarter of 2010 American businesses earned a profit at an annual rate of $1.659 trillion. This is the highest figure recorded since our government began keeping records 60 years ago. I want to repeat that so it sinks in, American businesses earned the highest profit recorded in over 60 years. In fact, for seven consecutive quarters profits have been growing at some of the fastest rates in history. These results have been overshadowed by our economists and their discussions on the state of the economy.
I would venture to guess that like me, Mr. Rogers would have difficulty identifying an economist or full time academic that we would ever entrust our own funds to manage if we were unable to do the job ourselves. In fact, I believe it would be difficult for just about everyone, including yourself, to come up with the name of an economist that you would entrust your life saving to. If you can, then you have a reason to base your investment decisions on the current state of the economy or the other countless economic projections readily available to you. The rest of you all should pay attention to corporate profits and the value these profits add to the businesses you own. If Mr. Rogers’s dream comes true, you will reap the rewards.
Disclosure: No Positions