Above The Fray

Macro Distraction Syndrome

Consider some recent headlines:

The Global Economic Crisis. This Could Get Really Ugly (Maclean’s)

Why The Debt Crisis Is Even Worse Than You Think (Bloomberg Businessweek)

Time For A Double Dip? The Growing Fear Of Another American Recession (The Economist)

Investors Rattled By Recession Signs (The Globe and Mail)

There is much to worry about and fear and anxiety are rampant among investors. Greece is at the precipice but concerns are that it will only be the first of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) to falter. The United States has lost its coveted “triple A” credit rating. Stock markets around the world have all declined and remain very volatile. Newspapers, magazines, television and internet websites cover the latest economic developments each day in excruciating detail. Indeed, it seems as if everyone is fixated on macroeconomic issues to the exclusion of everything else. Investors are suffering from a severe case of Macro Distraction Syndrome. In fact, it’s an epidemic!

Clearly, the political and macroeconomic issues the world is currently confronting are important. However, in my experience, the answers to these issues are not knowable with any reliability or precision and most often are not a prerequisite to achieving long term investment success. Nothing that is currently happening in the world has caused me to change or alter my view that the most wealth is created over the long term through the ownership of part or all of an outstanding business which is purchased at an attractive price. The best companies are able to adapt to the economic realities they face and manage their businesses to continue to deliver great results over the long term.  I am in complete agreement with Sir Winston Churchill who once said, ‘I am a man of simple tastes, easily satisfied with the best” Of course, Winston was talking about whisky and cigars, not stocks!

The current Macro Distraction Syndrome epidemic has given us an opportunity to selectively add to our existing holdings as well as add a new holding or two. We own some outstanding businesses that we have purchased at attractive prices. These businesses can continue to grow their revenues, earnings and cash flow whether the world is entering the mother of all recessions or not. In many cases, these businesses are paying dividends that provide superior yields relative to what an investor can get from long term government bonds or other fixed income alternatives. I call this getting paid to wait. To cite one example, we have been recent buyers of Nestle, the world’s largest food company. At current prices, Nestle has a dividend yield of just under 4% compared to Canada and U.S. 10 year government bonds with yields currently hovering near 2%. In the last 15 years, Nestle has grown its dividend by about 13% annually and future dividend increases are likely. Talk about getting paid to wait! Of course, Nestle is an outstanding business selling products such as chocolate bars, coffee, ice cream, infant baby formula, pet food and frozen pizza everyday to consumers around the world. Even in the most difficult of recessions, we believe that Nestle can continue to grow its revenues, earnings and cash flow at acceptable rates both through price increases and organic unit growth. While all this is good, it does not mean that the Nestle share price will not continue to drop from here and become even more attractively priced. Rattled investors can do all sorts of irrational things when distracted by macroeconomic considerations that create an environment of fear and panic. If that occurs, we will take advantage of such behaviour through disciplined buying of additional Nestle shares and other similarly beaten down stocks.

Let me end with an investment parable about the importance of not succumbing to Macro Distraction Syndrome as an investor. I am sure that just about everyone would agree that Coca Cola is one of the world’s best companies. Coke went public in 1919 at $40 per share (about $600 in today’s dollars). The purchase of a single share back in 1919 had a market value of just under $8.5 million with dividends reinvested as of the end of 2010. This represents a compounded annual rate of return of 14.4% over the full 91 year period. As with Nestle, Coke has a current dividend yield well above current long term bond yields and a long history of increasing dividends. Coca Cola has thrived in spite of a long list of macroeconomic challenges thrown its way over the last 91 years. The list of challenges included eight bear markets, thirteen recessions, a depression, a world war, an inflation rate that went above 15%, interest rates below 1% and above 21%, the Vietnam war, a presidential assassination, the cold war, wage and price controls and the 9/11 terrorist attacks. Coke shareholders clearly faced many points over the years where it would have been easy to succumb to Macro Distraction Syndrome and sell their shares in response to the political and macroeconomic challenges of the day. However, despite these formidable challenges over the years, Coca Cola continued to expand year by year and now sells 1.7 billion servings of Coke products per day in over 200 countries around the world. Patient shareholders with a long term time horizon have been suitably rewarded.

So what is the moral of this parable and how is it relevant to today? Simply put, buy well managed, outstanding businesses at attractive prices, especially those where you get paid to wait, and do not succumb to Macro Distraction Syndrome! As the late Peter Cundill, an outstanding global investor, liked to say, “The world has an incredible capacity to muddle through.”


“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.

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