Albert Einstein is reportedly quoted as saying insanity is doing the same things and expecting a different outcome.   Investors might feel the same way about changing an investment strategy that is currently working.  Why fix something that’s not broken.   I am not sure I would agree.

Investing is very much about the future and not the past.   You cannot drive a vehicle looking in the rear view mirror.   That said investors love to look back in explaining the outcome of events like the Great Financial Crisis (GCF) of 2008/09.  The reason for this is our evolutionary instincts to identify patterns.    If you can remember where the lion was yesterday there is a good chance you will avoid being dinner.   By analysing and explaining where things went wrong, we mistakenly believe that we are in control.  It makes us feel better, more confident that the future is indeed predictable; we just have to identify the pattern.  So let’s look back.

In the aftermath of the GCF central bankers around the world colluded and unleashed unprecedented monetary stimulus in the form of zero interest policy and something we had never heard of before called quantitative easing, better known as QE.   The purpose of QE is to drive down the cost of borrowing, effectively stealing from savers to bail out those in debt.

What was supposed to be a temporary fix has now been in place for 7 years.  It didn’t take investors that long to identify the pattern of low returns on traditional risk free assets of cash and bonds.   Seeking an alternative and sceptical of stock markets in general, investors piled into quality company shares or companies showing growth.  The share prices of companies with strong balance sheets, brands and predictable reliable earnings soared.  At the same time selling out of perceived lower quality companies with cyclical earnings and / or weak balance sheets driving these companies share prices through the floor.   This strategy has worked so well for so long surely you would be insane to think of changing.   I disagree.

Investor’s current willingness to pay any price for quality businesses irrespective of the underlying intrinsic value is in my mind the very definition of insanity.  It is so blatantly obvious like the proverbial elephant in the room, which no-one sees.   Price matters.  In fact that is all that matters.  To quote the most famous value investor of our time, “price is what you pay; value is what you get”. Warren Buffett

The divergence between the prices of quality “blue chip” businesses and  those perceived lower quality cyclical companies is either offering investors the biggest opportunity of a lifetime or the biggest threat depending on if they see the “elephant” or not.   Unfortunately as you may know it is not easy to see an elephant standing still in the bush.


Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746

Price is all that matters