In their latest article titled – Dangerous Thinking: This Time Is Different, Brandes Investment Partners discusses the danger in thinking that this time is different due to changes in technology. Here’s an excerpt from the article:
Sir John Templeton famously warned in the eleventh of his “16 Rules for Investment Success” that the investor who says this time is different has uttered “the four most costly words in the annals of investing.” The legendary growth fund manager was making the point that one needs to be careful of rationalizing why the current environment will end better than a similar one did previously.
Why do we bring up Templeton’s quote from more than 25 years ago? Today, the pace of innovation is changing our lives so dramatically that it can be tempting to think that surely the business landscape is no longer what it once was. And in the past, investors have falsely believed that sharp advances in security prices would continue because of some new development.
Even Templeton reportedly conceded that the investor who says this time is different has a 20% chance of being correct. Disruptive technologies have indeed threatened a variety of industries, causing some investors to question the idea of mean reversion and whether certain companies or entire sectors can return to prior levels of growth.
We consider it our job as an active value manager to differentiate between those industries whose fundamentals are being disrupted from those who are only experiencing stock price disruption. Opportunities can arise if the market overreacts to the threat of disruption and underappreciates a seemingly threatened company’s moat or durability.
Indeed, we think active value management is the most logical approach to investing when disruptive technologies roil the market. Obviously, passive or index strategies pay little heed to secular changes, and smart-beta factors that rely on price-to-book or price-to-earnings multiples to drive stock selection may miss company- or industry-specific nuances.
Technologies May Change: Investing Fundamentals Don’t
Today is different from the past in many ways. But the principles guiding our active value investing approach haven’t changed. And the disruption we’ve witnessed recently only strengthens our belief in the need for investors to distinguish potentially undervalued businesses from cheap companies that may only get cheaper.
You can read the original article here:
Brandes: Dangerous Thinking: This Time Is Different
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