Together with other institutional investors and
selected media, in March this year we received our copy of the Goldman Sachs report
“The Long Good Buy; the Case for Equities”,
written by strategists Peter Oppenheimer and
Matthieu Walterspiler with assistance from
an army of analysts.
Thankfully our own investment director
Harald Espedal had managed to accurately
communicate our strong faith in equities for
the coming decade in this feature beforehand,
otherwise people might have thought that we
had plagiarised the Goldman analysts.
“The Long Good Buy; the Case for Equities” is a dry, 40-page theoretical and empirical review of the historically low pricing of
equities. The title is a twist on a Raymond
Chandler novel. Its relevance is not completely clear, but that is often the way with financial headlines: You try to inject a bit of life
into something which is matter-of-fact and
technical to interest your readers.
The message is that equities are historically cheap, especially for patient investors.
In relation to earnings in the companies and
in relation to the interest on bonds, buying
equities has hardly ever been more attractive.
At least that’s how it looks from a historical
perspective if you analyse the figures for the
past few decades.
However, since 1999 equities have been
in decline. They were priced too highly, and
since then reality checks have knocked the
stock markets again and again, culminating
in the financial crisis in 2008. But at some
point the situation has to change.
If you are a long-term investor in SKAGEN,
you may not have discovered this trend, but,
put simply, the growth in the value of your
assets is due to greater returns from the funds
rather than general increases in the stock
Frightened of losses
The investment guru Warren E. Buffet takes
the same positive attitude to equities compared with bonds and gold. In this year’s
newsletter to the Berkshire Hathaway shareholders, Buffett and his team explain that
equities are, basically, the most productive
hand has limited uses, while government
bonds depend on other people’s determination to keep inflation down.
Buffett’s newsletter has led to interesting
debates in the media and on the Internet.
However, while Buffett is treated respectfully by the media, the same is not true for
the investment bank Goldman Sachs. Google
the title “The Long Good Buy; the Case for
Equities”, and you will discover that the
net is awash with analyses and comments,
many of them rather critical. If you search
long enough, you will undoubtedly also find
a copy of the report which we do not have the
rights to distribute.
Warren E. Buffett emphasises a fact
which cannot be repeated often enough: In
the short-term, risk can be measured by the
expected price fluctuations which are bigger
for equities than for bonds. In the long-term
however – which is what is relevant for most
of us – the risk is the fear of losing purchasing power, if your investment doesn’t create
value. And in the long-term it is especially
important that you carry out your stock investments when the markets are priced low and
fear is prevalent in the markets.
However, equities have been cheap for
some time, and if it is so obviously wrong,
why don’t the financial markets correct it?
Irrelevant in the short-term
One of the main explanations is, quite simply,
that it is easy to find many arguments that the
developed countries will limp along for many
years to come, burdened by debt and unemployment, especially southern Europe. This
will continue to drag down the stock markets,
while the process of paying off the debt will
take decades. We do not necessarily agree,
but it influences the markets.
Another explanation is that so many private investors and institutions have had
their fingers burned by the stock markets
since 2000/2001. Each time they have risked
their necks and increased their equity investments, they have lost money. Now, they cannot take any more, and dare not believe that
the biggest potential is actually in the stock
market rather than in gold, bonds, commodities, property and all the other investment
A third explanation is that pricing equities
is meaningless in the short, six-month term,
as shown by calculations from the Goldman
analysts. Over the short-term, there is no clear
correlation between pricing and returns. High
multiple equities continue to be high multiple, while cheap stocks remain cheap. For
the short-term speculative investors – who
dominate the market and who strongly influence the financial analysts – it is the marginal
changes that create value. Better than expected financial statements, a movement in the
relative prices between companies etc. or a
negative management change.
For SKAGEN it means, among other things,
that even in an era of abundant information,
we can find incorrectly priced businesses
because so many other investors think and
act short-term. We continue to believe that
real values will win in the long-term, and that
the next ten years will be better for the stock
markets than the past decade.
C h r i s t i a n J e s s e n
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