Given the six-year anniversary of the 2008 financial cataclysm it is instructive to assess what has since transpired with our nation’s private and public debt. Our banking system is much stronger now—having paid down more than $3 trillion of its obligations—while our government has, largely due to its desire to help the banks, added an even larger amount of debt to its balance sheet1. This process has been financially energizing to the economy, but we are skeptical as to how long a model of unbalanced fiscal discipline can continue should the numbing camouflage of historically low, manipulated interest rates eventually dissipate.
A recent Wall Street Journal article reported on the growth of mobile messaging apps that have “attracted the attention of Internet giants like Facebook Inc., which in February said it would pay $19 billion for WhatsApp.” In our minds that quote would more accurately have ended, “…pay WhatsApp shareholders $4 billion in cash and $15 billion of Facebook stock.” While less succinct, there is a critical point to be made in examining this transaction and what it may say about Facebook’s view of its own stock value. It is also instructive with regard to what we believe are properly valued companies that are buying back their shares and paying cash for acquisitions rather than building faux empires while casually handing out company shares like candy.
With newly minted Federal Reserve Chair Janet Yellen taking over her post in the midst of extraordinary global monetary stimulation, it makes sense to discuss interest rates and fixed income investing—two things she is now fully in charge of managing. Ms. Yellen is clearly a bright academic, but she is taking the helm at a challenging time when an unprecedented amount of Fed stimulus is just starting to be eased.
Hamilton Point selects individual stocks in our Global Core and Equity Income strategies based upon our firm’s fundamental research. Our work strives to identify investments that produce “free cash flow” at levels that justify the risks taken. In our minds, this is how we differentiate between speculating and investing. Though future performance can never be guaranteed, we believe this methodology can allow investors to do well, even over periods when market performance, in hindsight, was lackluster.
This Newsletter was inspired by a Rotary Club meeting during which Hamilton Point team member, Nate Byrd, was asked whether our company was, in the spirit of Rotary, truly “beneficial to all” and how we managed to balance the interests of customers, employees, shareholders and society. Nate cited our independence and the fact that we “eat our own cooking” by personally investing alongside our clients, but the question deserves a longer explanation than was suited to that venue.