EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. This week, Elana talks with Robert Gill, Senior Vice President and Canadian Portfolio Manager, Goodreid Investment Counsel.
What is your outlook for quality investing?
We believe that we can generate the best returns for our investors through participating in the economics of unusually high-quality businesses and owning well-established companies run by prudent and capable management teams. However, at present, we are currently facing a much different investment environment than we have experienced for the past decade. In the Spring of 2022, interest rates suddenly sprung to life after laying dormant for over a decade. Long gone are the days of low interest rates, with inexpensive capital financing the outperformance of growth companies. In that kind of environment, it was relatively simple to make money in the stock market, with a rising tide lifting all boats. As a result, it has now become much more of a stock picker’s market, and a good time for active managers to ply their craft and identify attractively valued investment opportunities. We understand that while the operating environment won’t necessarily be tranquil every year, the best companies will cope with obstacles more effectively than their competitors, and they will continue to rise to the top.
Where do you see the greatest opportunities and why?
We believe the greatest investment opportunities tend to fall into one of two categories: reversion-to-the-mean and long-term quality compounders. The reversion-to-the-mean investment opportunities are names that have experienced pockets of structural inefficiencies which have negatively impacted share prices. Because shares have traded lower, this presents us with a buying opportunity with an embedded margin of safety at the time of purchase. Investors can benefit from owning the shares and simply having the share prices revert to their prior trading level. Usually, such investment opportunities pay impressive dividend income while waiting for that capital appreciation to materialize. Some of these more attractive opportunities are in infrastructure names with irreplaceable assets that boast what Warren Buffett refers to as “economic moats” in the form of insurmountable barriers-to-entry. Even better is that some of these companies compete within the comfortable confines of a cozy oligopoly which insulates the participants from any significant outside competition. Consequently, the competition remains both friendly and muted.
A second category where we see the greatest opportunities are quality-compounding companies that are long term-investments. These companies often provide safety of capital in down markets, while also offering favorable growth opportunities in more buoyant economic climates. In particular, we see opportunities in both consumer staples and technology – and certainly not limited to the Magnificent Seven.
What are the greatest challenges you face and why?
The investment business certainly offers many challenges, but this is what makes it such a compelling vocation. One of the greatest obstacles that we are faced with is filtering through the tidal wave of information that we are bombarded with. There are only a finite number of hours in a day, and like allocation of capital, allocation of your time is also critical. Investing is a constant effort to decide how you want to allocate your time and separate the wheat from the chaff when it comes to the data that must be analyzed while managing investment portfolios. In the almost three decades that I have been in this industry, the amount of information and data that is available to investors has increased exponentially. Further, the computing power available to investors has increased at a similar clip. Because data is helpful in making decisions, and because the human condition is predisposed to believe that more is better than less, most investors, naturally, believe that access to all this data and technological power will be value-additive to their investment process. However, there is no tangible evidence that businesses are more accurately and efficiently priced in the stock market today than they were decades ago. In fact, the opposite can be said. Often, the wonders of technology and the much-improved speed of communication can facilitate rapid and large inefficiencies in the stock market. This can result in the gift of temporarily mispriced, high-quality securities for the discerning and astute investor.
What keeps you up at night?
In his infinite wisdom, legendary baseball catcher and manager Yogi Berra proclaimed that, “it’s tough to make predictions, especially about the future.” As a result, we remain vigilant in preparation for unforeseen and outsized market movements -- a Black Swan event. Fortunately, while the world has always been faced with difficult crises, it has managed to come out the other side. Yogi is indeed correct -- forecasting with any degree of precision is inordinately difficult. Further, humans have proven time and again that they are resolutely poor at such a task. Rather, author Morgan Housel states that the wisdom in having room for error is acknowledging that life’s unknowns such as randomness and uncertainty are ever-present. He maintains that it is possible to plan for many risks, except the outcomes that are too extreme to contemplate. However, applying Benjamin Graham's Margin of Safety is arguably the most risk-adverse way to achieve successful outcomes when faced with a range of possible investment opportunities. Graham himself states "the purpose of margin of safety is to render the forecast unnecessary."
