Regardless of the macroeconomic backdrop, we believe our process gives us a long-term advantage over other investors.
It’s January, the start of a new year. And that means investment strategists and portfolio managers have flooded the Internet with their predictions for where the market is going to go in 2018. Some give specific targets for the S&P 500. Some talk about industries or investment styles — value, growth, small caps, and so on — that are likely to do well and should command your investment dollars.
I am sorry to report that we don’t have a very good crystal ball. We don’t have year-end price targets for any of our benchmarks. And we don’t make predictions about anything. That’s just not part of our process for investing our clients’ money the best way we know how.
3 minutes of macro
It’s not that we don’t think about and discuss the macroeconomic environment. We do. But it doesn’t dominate our conversations. Instead, we prefer to take the Peter Lynch approach to macro analysis. The investing master once said:
“If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.”
With that in mind, here are three macro trends that should continue to have the most influence on global stocks in 2018.
- First, monetary policies from global central bankers are still easy, even if some central banks will be raising rates in 2018.
- Second, the global economy continues to grow, which provides opportunities for companies to increase their sales in 2018.
- And finally, the best companies in the world continue to find ways to get better at what they do, which drives earnings and cash flow growth.
Staying the course in 2018
That’s a succinct overview of the macro situation in which investment managers have to make capital allocation decisions with your money. Different firms will do different things with that information and the research they gather. In 2018, just as we did in 2017 and as we will do again in 2019 and beyond, we’ll be sticking to our investing philosophy: looking for high-quality growth companies around the world and trying to pay a reasonable to attractive price for their stocks.
Quality means different things to different people, whether we’re talking about companies, cars, or consumer electronics. At Motley Fool Asset Management, we estimate the quality of a company using four categories: management, business economics, competitive advantage, and the sustainability of 10 or more years of growth.
The Motley Fool has been recognized as a great place to work because of our compelling mission to help the world invest better, our unique corporate culture, and our leadership team. We look for those same attributes in other companies, as research has shown that they tend to outperform their competition and the market over the long term.
We prefer to invest in management teams that have a proven track record of making good decisions for their businesses. We carefully consider the incentive compensation packages that will have a tremendous influence on the decisions management teams make. And when possible, we prefer management teams that find the best balance of serving customers, suppliers, employees, shareholders, and their communities. A good investment could turn into a great one if the management team running the show is a cut above the rest.
At Motley Fool Asset Management, we spend a great deal of time studying companies’ business model — significantly more, in fact, than the three minutes we spent on the macroeconomic environment. First of all, we really love researching companies and how they make money. Second, the economics of business is a foundational part of our investment philosophy.
Consider this. In the Global Opportunities Fund, Amazon.com has the digital and logistical assets needed to deliver products and services to customers with amazing efficiency. In the Small-Mid Cap Growth fund, Thor designs and manufactures recreational vehicles to a consistently growing number of customers. And in the Emerging Markets fund, NMC Health provides healthcare services in the United Arab Emirates and Spain.
Those three business models couldn’t be any more different, yet their economics make them leaders in their industries. We spend a great deal of time understanding how businesses work, and how well they work, to try to allocate capital to the best ones around the world.
No two businesses are the same, especially if they operate in different industries. As a result, some businesses are just better than others. The success of one company over another could be a result of the competitive dynamics of the industry in which they operate. It could be that management teams have made different choices about how to compete. Or it could be that one business developed an innovative solution to a problem before its competitors and got to the market ahead of them.
Whatever the reason, we prefer to invest in businesses that have an advantage in their marketplace and are likely to maintain that advantage for many, many years. Sometimes that can mean buying the stock of a company with an already well-known advantage. Other times, it can mean buying shares of a company that is just starting to build its competitive advantage. Either way, we prefer to invest in companies that we believe are less sensitive to competition and can generate above-average returns on investment relative to its competitors.
10-year growth outlook
At Motley Fool Asset Management, we prefer to invest in businesses we think will be bigger and stronger in 10 or more years. They don’t have to be the fastest-growing businesses in their industry, but we want to be confident, based on our analysis, that the businesses we invest in will deliver good sales, earnings, and cash flow growth over the long term.
So we look for businesses that serve large markets, like Amazon.com. We look for businesses that can develop new products and services to expand the markets they serve or even create new ones. And we even look for businesses that make smart acquisitions to try to capture more market share within the markets they serve. However they plan to grow, we look for businesses that have many ways to do so.
Putting it all together
As we continue to focus on looking for high-quality growth companies around the world and trying to pay a reasonable to attractive price for their stocks, we rate the quality of each company based on the four attributes we’ve discussed her and then assess the risks and rewards associated with their stock prices. Regardless of the macroeconomic backdrop, we believe our process gives us a long-term advantage over other investors. And we promise to continue to do our best to use that process to make the best investment decisions we can for our clients.
As of 12/31/17, The Motley Fool Global Opportunities Fund held 4.94% of its portfolio in Amazon.com. It held 4.23% of its assets in NMC Health. The Motley Fool Small-Mid Cap Growth Fund held 6.65% of its portfolio in Thor Industries. The Motley Fool Emerging Markets Fund held 5.94% of its portfolio in NMC Health.