Good Morning,

U.S. equities closed down on Friday — the last day of the first quarter and of the month — as investors digested a slew of economic data.

The Dow Jones industrial average fell about 65 points, with Goldman Sachs and Exxon Mobil contributing the most losses. The S&P 500 slipped 0.23 percent, with financials lagging.

The Nasdaq composite closed just below breakeven.

The three major U.S. indexes posted quarterly gains of at least 4.6 percent. The Nasdaq also recorded its best quarterly performance since 2013 as tech stocks rose more than 12 percent in the period.

Our Take

Last week there were some jitters about whether or not Trump’s potential pro growth policies would be delayed, but the market has since remained resilient. March marked the 8th anniversary of the bull market and we hold that the show will go on despite Trump’s bumblings.

There are pockets of value despite repeated calls that “stocks are overvalued” and furthermore for the first time in 6 years double digit earnings growth looks real. Focus on the fundamentals. While stocks have been ascending ever since the election, it’s unlikely the rally would’ve gotten this far without the contemporaneous improvement in earnings, which last year ended one of the longest streaks of declines ever in a U.S. bull market.

Despite oil’s slump to skepticism over Trump’s growth agenda, Wall Street analysts have been standing firm on forecasts that represent almost twice the profit growth seen in 2013, a year when the S&P 500 rose 30 percent.

S&P 500 operating income will rise 12 percent to $130.20 a share this year, estimates compiled by Bloomberg show.

For the health of your investments, earnings are what matters. Long-term fundamentals drive stock prices. Short-term the political noise can impact sentiment but time and time again over the last 8 years buying the dips has worked…

Musings

A focus on the long-term matters. It has a determinate impact on our investment outcomes but more importantly on whether our lives will be remarkable or simply average.

More on that later. First I wanted to highlight the incredible outcomes reserved to those who think long-term. This week I read an excellent research report produced by a team from McKinsey Global Institute in cooperation with FCLT Global which found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2011 across almost every financial measure that matters.

The differences were dramatic. Among the firms the team identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. The returns to society and the overall economy were equally impressive. By their measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015.

In addition, they calculated that U.S. GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level their long-term stalwarts delivered — and generated more than five million additional jobs over this period.

What indicators were studying? 1) Investment 2) Earnings Quality 3) Margin Growth 4) Earnings Growth 5) Quarterly Targeting

After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample).

What is clear from the performance gap between these two groups is the massive relative cost of short-termism.

From 2001 to 2014 those managing for the long term cumulatively increased their economic profit by 63% more than the other companies. By 2014 their annual economic profit was 81% larger than their peers, a tribute to superior capital allocation that led to fundamental value creation.

Now this makes me think of the countless examples I encounter on an almost daily basis of short-termism. It is not simply corporations that favor these costly short-termist agendas. It is the average human or at least 73% of the population…..that chooses the easy money vs. the long money. The easy choice or the choice that seemingly brings the most juice today. Nevertheless, real change is possible. This is one of the key messages from the research.

The proof lies in a small but significant subset of the long-term outperformers identified in the study — 14%, to be precise — that didn’t start out in that category. Initially, these companies scored on the short-term end of the index. But over the course of the 15-year period they measured, leaders at the companies in this cohort managed to shift their corporations’ behavior sufficiently to move into the long-term category.

As an investor it is best to develop the ability to identify such long-term value creators, as well as those companies who are shifting their behavior.

As a human it is best to look at ourselves in the mirror and ask what short-termist behaviors we are exhibiting and how we can change such habits. Upon honest reflection, what we will undoubtedly find is that we are leaving a considerable amount of “value” and long-term “fulfillment” on the table….

Thought of the Week

"The most important quality for an investor is temperament, not intellect.” -Warren Buffett

Stories and Ideas of Interest

A world without retirement. The population is getting older and the welfare state can no longer keep up. After two months of talking to people in Britain about retirement, it’s clear that old age is an increasingly scary prospect. The Guardian digs in.
Compelling new evidence that robots are taking jobs and cutting wages. In a recent study (pdf), economists Daren Acemoglu of MIT and Pascual Restrepo of Boston University try to quantify how worried we should be about robots. They examine the impact of industrial automation on the US labor market from 1990 to 2007. They conclude that each additional robot reduced employment in a given commuting area by 3-6 workers, and lowered overall wages by 0.25-0.5%. A central question about robots is whether they replace human workers or augment them by boosting productivity. Acemoglu and Restrepo’s research is a powerful piece of evidence on the side of replacement. Furthermore, automation is set to hit workers in developing countries even harder. The fourth industrial revolution looks set to cause global mass unemployment. Could we tax robots as Bill Gates has proposed? The Economist suggests that this idea is misguided.

Silicon Valley’s quest to live forever. Can billions of dollars of high-tech research succeed in making death optional? Forget retirement. Some are actively working on finding a cure for death. The New Yorker digs in and considers the incredible amount of money and effort being deployed towards achieving eternal life. I’ve always looked at this through the following prism: does the present moment really have any significance if it isn’t fleeting or precious?

Your animal life is over. Machine life has begun. The road to immortality. In California, radical scientists and billionaire backers think the technology to extend life - by uploading minds to exist separately from the body is only a few years away. Yes that’s right. Forget the problems with robots replacing humans, when we will be able to achieve “morphological freedom” – the liberty to take any bodily form technology permits. “You can be anything you like,” as an article about uploading in Extropy magazine put it in the mid-90s. “You can be big or small; you can be lighter than air and fly; you can teleport and walk through walls. You can be a lion or an antelope, a frog or a fly, a tree, a pool, the coat of paint on a ceiling.” No wonder Elon Musk is founding another company called Neuralink which will focus on merging man and machine through the “neural lace”...talk about thinking long-term...

Given the circumstances our existence, shouldn’t we just kill ourselves? French philosopher Albert Camus did an excellent job describing those moments in our lives when our ideas about the world suddenly don’t work anymore, when every daily routine — going to work and back — and all our efforts seem pointless and misdirected. When one suddenly feels foreign and divorced from this world. In these frightening moments of clarity we feel the absurdity of life. Luckily, his interpretation of the myth of Sisyphus offers us salvation. Sisyphus was sentenced to push a boulder up a hill, just to see it roll down again, and keep doing so forever and ever and ever. Camus offers a bold statement: “One must imagine Sisyphus happy.” He says, Sisyphus is the perfect model for us, since he has no illusions about his pointless situation and yet revolts against the circumstances. With every descent of the rock he makes a conscious decision to give it another go. He keeps pushing that rock and recognises that this is what his existence is all about: to be truly alive, to keep pushing.

A dearth of I.P.O.s but it’s not the fault of red tape. Nice piece in the NY Times exploring possible explanations yet finding that while there might be rational reasons to reduce regulation on capital raising — to make it easier and less expensive — we are kidding ourselves if we think that simply deregulating will bring back initial public offerings.

Not leadership material? Good. The world needs followers. The NYT suggests that the glorification of leadership skills, especially in college admissions, has emptied leadership of its meaning. I love this. Very contrarian. “Perhaps the biggest disservice done by the outsize glorification of “leadership skills” is to the practice of leadership itself — it hollows it out, it empties it of meaning. It attracts those who are motivated by the spotlight rather than by the ideas and people they serve. It teaches students to be a leader for the sake of being in charge, rather than in the name of a cause or idea they care about deeply. The difference between the two states of mind is profound. The latter belongs to transformative leaders like the Rev. Dr. Martin Luther King Jr. and Gandhi; the former to — well, we’ve all seen examples of this kind of leadership lately.”

All the best for a productive week,

Logos LP