One of our portfolio managers recently read a book entitled “In Order to Live” about a North Korean girl’s journey to freedom. While heartbreaking, harrowing, and inspiring at the same time it also made him think we should try and clarify our investing position on international companies. Of course, it also ties into our third quarter commentary about America being anti-fragile and the underlying theme that an individualistic, non-authoritarian framework fosters success. “In Order to Live” brings to light that the indomitable will to survive and thrive is infectious, formidable, and not only possessed in America. It is definitely part of what makes America great and may be its greatest export, but there are highly driven people across the entire globe chasing their dream of success and freedom. To that end, we pursue a similar philosophy with our flexible investing style across a vast array of asset classes, international in particular. So let us clarify how flexible and pragmatic we are in our investing strategy versus a dogmatic, rigid style that doesn’t reflect our overriding philosophy.
Being flexible can mean many things, but the primary way our strategy plays out in international investing is that we have chosen global instead of just international. We pursue managers who want to find the best companies and the best values no matter where the company is domiciled. If Airbus is better than Boeing or Toyota is better than Ford, or Taiwan Semiconductor better than Intel, then we want to own the best company and not be forced to settle by prospectus to own the lesser player. We may drift into an esoteric market like emerging markets or small capitalization international if asked, but the primary way we like to play in the international markets is via global funds. There are reasons you buy international companies as they are oftentimes non-correlated, mispriced, and can protect from home bias mistakes (just ask a Japanese investor who has only invested in Japanese stocks for the past thirty years). Currently, international companies trade at a two standard deviation discount to U.S. based companies based on forward price-to-earnings ratios, nearly 36%, so there is reason to delve into international companies if you believe in buying low and selling high. In addition, the U.S. now constitutes 64% of the global market capitalization. This number fell to around 40% in 2009 but has never been this high dating back to 1987, per J. P. Morgan Asset Management (which only tracks back to 1987). We spotlight this not to say that one should put all one’s money into international stocks, but we instead are keeping with our nondogmatic viewpoint and allowing our global managers to allocate to different areas around the world based on opportunity.
Another area where our flexible investment style comes into play is in our interpretation of Efficient-Market Theory investing via index funds. We have tried to make this point several times in the past, but we realize sometimes ideas get lost in translation. We are not against index funds, but we are also not dogmatically driven to only invest in passive, index funds. We understand and applaud the race to lower fees in index funds and exchange-traded funds (“ETFs”). However, there are times when index funds do not perform better than a well-run active manager, and there are sectors where alpha is significant and consistent that justify active management. We are flexible in our philosophy and will use whichever one we believe serves our client best. As an aside, investor behavior has a great deal of weight in this argument, in our opinion, as the textbook reasoning for using an index fund oftentimes grossly underestimates the mental fortitude of investors. Specifically, many do not want to hold onto a passive index when it goes down, but they will trust a manager with a compelling story about a holding (or holdings) when prices fall. Which begs the question, does passive investing work if you don’t buy and hold for the long haul, and are you more convicted in a rules-based index or an active manager when a market correction occurs? Our interpretation is that whatever strategy keeps you invested in the market instead of trying to time the market is what is most important, and a mixture of the two oftentimes works the best as it allows for nimble tactics instead of gross overreactions.
The final area we want to highlight as an example of our flexible, non-authoritarian management style is our inflation plays. Our fixed income, commodities, and energy investments all reflect our inflation strategy. You will note that we have never made big duration calls on fixed income out of respect for inflation and interest rate risk. We use flexible, conservative managers that have displayed a history of minimizing downside, and that has been more important to us than chasing yield in an environment where inflation has been historically low and could easily spike higher given debt levels, geopolitical risk, and resource constraints. Regarding energy and commodities, we have added commodity exposure via commodity ETFs, Standpoint Multi-Asset Strategy, and energy companies as our preferred way to provide asymmetric inflation protection. They have served us very well in the past with their admirably non-correlated returns in 2022 while technology was down 30%+. More important to us here is the contrarian play given that energy makes up 3% of the S&P 500 now (was 15%+ in 2009), has a projected shareholder yield of 6.8% per J. P. Morgan Asset Management, and the only P/E ratio below its historical average in the S&P 500. In addition, per Barron’s magazine, the oil industry states that most oil companies can turn a profit above $40 a barrel, and we are presently way above that. Finally, everywhere you read, we are in desperate need to raise our energy output for all of our artificial intelligence needs, yet energy and basic materials are two of the worst performing sectors in the market this year.
We realize that our clients are highly successful individuals that didn’t get to where they are in life by being rigid and inflexible in their thought process, so this letter may not be revelatory. However, we thought it was important to remind how much we employ and value flexibility in thought process. Continuing with the model of this letter and the last one, we are strong believers in the anti-fragile, capitalist model full of innovation and flexibility and not the authoritarian, centrally commanded North Korean model, as stark as that may be. To that end, we always want you to know we are available for any questions you may have regarding your investment strategy. Please reach out anytime and we hope you had a wonderful set of holiday gatherings with family and friends.
P.S. - The book we mentioned “In Order to Live” can be disturbing on its way to hopefulness so it is not a light read, but we did think it was worth sharing. Other books recently read and recommended by fellow Creative Financial employees are: "Elon Musk" by Walter Isaacson, "The Fund" by Rob Copeland, "Band of Brothers" by Stephen Ambrose, "Trouble Boys" by Bob Mehr, "Greenlights" by Matthew McConaughey, “The Psychology of Money” by Morgan Housel, “The Untethered Soul” by Michael Singer, “Outlive” by Peter Attia and Bill Gifford, “Empire of the Summer Moon” by S.C. Gwynne and “Killers of the Flower Moon: The Osage Murders and the Birth of the FBI” by David Grann (so much better than the movie).
P.P.S – If you have any book recommendations you would like to share with us, please reach out as we always are looking for another good read.
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Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions. SSI, its affiliates and its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein.
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