Famed investor Peter Lynch often discussed his basic principle of investing in companies you’re familiar with. Credited with leading the Fidelity Magellan mutual fund on a multidecade, above average performance streak, it was even rumored Lynch would add stocks his children brought to his attention, participating in early trends before unsuspecting adult investors caught on. On the other hand, I’ve also witnessed this strategy reap disastrous outcomes, as people buy stocks assuming that because their product or service is solid, the stock will follow, only to be sadly disappointed.
As I mature as an investor, I would like to be known for adjusting this theme only slightly to include common sense correlations which are sometimes so obvious, you may think they’re too simple and therefore pass on the investment altogether.
Take the recent pandemic for instance. When lockdowns transpired and Americans were relegated to their homes for an indefinite amount of time, it made perfect sense that technology companies would benefit. While most stores were closed, Amazon was open and thriving and not only would they meet our product needs they would boast the greatest profitability they had ever seen in subsequent quarters. We chose to participate in this through the NASDAQ 100 index or the QQQ. In retrospect, we should have added this position as soon as we went into lockdown, however it was better late than never. While at the time, it may have seemed a bit unconventional I would argue that even the most novice investor now understands our thoughts in hindsight.
Unfortunately, these themes don’t always play out as planned. Inflation, for example, has been at levels not seen in decades, yet one of the most reliable investments that should benefit from this, Gold, has been stuck in the mud. I contend that it remains a solid long-term hold, however the price action has yet to confirm this, so for the time being, we’ll continue to wait. Our read on recent inflation has been spot on, our theme regarding Gold has so far stunk.
Bigger picture themes are playing out before our eyes every day, which keeps me very optimistic about the economy, such as the progress with renewable energy, technological innovations in sectors such as health care or automobiles, or the developments of Web 3.0 which will bring about virtual reality, educational benefits and global connectivity which will make the current social platforms look like a fax machine or dot matrix printer . The reality is, despite grave concerns over our country’s division or political angst, I believe America remains the greatest country in the world by far, with an incredible future.
Another theme I am becoming increasingly interested in will be the result of what so many are concerned about at this present moment.
Over this past year you would have to be living under a rock to not know that everything from steel to copper has risen in price considerably as a direct result of supply chain issues and pent-up demand. While these prices have sent shockwaves through various industries, I believe it critical to consider who is benefiting from this and evaluate any and all investment possibilities.
Unlike the United States, which boasts countless valuable assets, most countries around the world do not have such a diversified asset base. Whether we like it or not, most countries throughout the globe contribute to the larger economic system through their labor force and exporting natural resources. Countries in Latin America, for instance, often struggle with unstable governments, infrastructure issues and a lacking financial structure yet boast massive oil reserves. Venezuela, for one, has a larger oil reserve than Saudi Arabia, making it one of the most oil rich countries in the world.
Did you know that Chile is the world’s largest producer of Copper, followed by Peru?
Or how about the fact that China, one of the largest countries still classified as an ‘emerging market’, is the world’s largest producer of both Steel and Aluminum?
China also takes the top spot with Tin; however, Indonesia, Peru and Bolivia hold respectable positions on the Tin chain as well.
The economics of this are really quite simple. As these commodities have risen in price, revenues from exporting these products are also on the rise. As the countries export these materials the increased GDP should flow through to capital investments all throughout the country. Simply put, as commodity prices increase, the downstream result should be greater value within the exporting country and therefore increased value in the companies who call those countries home.
Of course, there remain headwinds such as growing political tension between China and Taiwan, two of the largest invested areas within the group, which is why I believe the move has been slow to transpire. In the event there is further military advancement by China towards Taiwan, all bets are off and without question this would impact not just emerging markets but domestic as well. While I don’t claim to be a geopolitical soothsayer, I will say it is a risk worth considering when looking at position size as is the case with any investment we make.
Emerging markets have been a thorn in the side of diversified portfolios for years. Take this year for instance, as the S&P 500 adds over 20%, emerging markets are negative. The EEM or Emerging Market index ETF is currently trading around $50.00 per share, which is a solid move higher off the Covid lows of $30.00; however, the current price of $50.00 is also the 2018 highs, as well as the 2007 highs. The reality is that emerging markets haven’t emerged with any profits for investors in almost 15 years.
The backdrop seems ripe for this to change and it is my opinion that barring any significant military conflict between China and Taiwan, this may be one of the best opportunities going forward. While many are counting the group out as dead weight, I am of the opinion it will eventually become one of the best performing asset classes in the coming years.
Time will tell.