Value investing firm First Eagle Investment Management recently released his Q2 2020 Market Commentary in which they discuss the importance of patience and fortitude at a time when investors are being drawn to the tech stock market darlings. Here’s an excerpt from the letter:
The current equity market rally has been notable for its lack of breadth; the proportion of stocks in the MSCI World Index outperforming the index as a whole stood at 37% at the end of the second quarter, a low not seen since before the bursting of the dot-com bubble.
Perhaps not coincidentally, a new breed of technology stocks is leading the charge this time around, both well-established (the so-called FANG stocks) and less so. In the latter category, we would include Square (which traded at about 175 times trailing 12-month earnings at quarter’s end), Zoom (which traded at about 1,500 times trailing 12-month earnings) and Shopify (which had no trailing 12-month earnings). IPOs were also hot in industries as diverse as biotech and insurance, as well as in special purpose acquisition companies (SPACs).
Clearly, there have been outsized returns to be gained in these market darlings, assuming an investor knows when to buy and to sell ahead of the thousands of competitors trying to do the same.
Moreover, as the prices of these stocks continue to climb faster than any improvement in fundamentals, arithmetic suggests that their expected future returns will be lower unless they can capture market share at an extraordinary rate or further expand their already-high multiples.
This is not a game in which we’re interested in testing our luck. Now is the time for patience and fortitude. Rather than stake everything on change agents that might shape the future, we prefer to humbly accept that the future is unknowable and seek to own businesses with scarce, durable assets that we believe have the potential to generate persistent earnings power over time—and acquire these businesses at prices consistent with our strict valuation discipline.
We further seek companies supported by prudent management teams and robust capital structures, and we believe such companies generally will be more poised to deliver shareholder value over the long term—with less speed perhaps, than growth stocks, but also, in our view, with greater likelihood.
To these positions we add ballast in the form of gold and cash and cash equivalents. For us, gold serves as a potential hedge while also providing the strategy with longer-term purchase optionality. Insofar as inflation has remained muted, the opportunity cost for holding gold, as reflected in real interest rates, has continued to decline globally at the same time fundamentals supporting fiat currencies deteriorate.
You can read the entire market commentary here:
First Eagle Q2 2020 Marker Commentary.
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