Where We Are Looking For Value

Previously, we shared the year-to-date results for several international indices and discussed how short-term volatility creates opportunities that we work to exploit.  Longer-term returns for this group of indices are even more interesting.  This chart shows their performance against the S&P 500 over the past decade:

The results are striking: the stock prices of a basket of U.S.-domiciled companies have dramatically outperformed their international counterparts.  In Latin America, this relative change in prices is even more pronounced.  These index movements have had a predictable impact on prevailing valuations:

Of course, it is insufficient to look at headline returns and aggregate valuation metrics and assume there is a treasure trove of opportunity, but these stark differences in past appreciation and current valuations are useful as starting points for where to focus our research.  As long-term value investors, it makes sense to study equity markets and economic regions where stock prices have fallen, or, at least, have risen more slowly and where valuations are more attractive.  We have made research trips to Belgium, France, Germany, Great Britain, Greece, Hungary, Israel, Mexico, the Netherlands, Poland, Russia, and Spain this year.  We expect our current international focus to remain until the valuations of U.S. businesses become more attractive.

To be clear, we do not invest on a top-down basis in any country or region.  For example, indices in emerging markets are heavily weighted with financials, commodity producers, and utilities.  Industries like these are typically difficult for foreigners to underwrite and therefore have limited interest to us.  We remain security analysts who hunt widely and carefully for quality businesses with high returns on incremental capital led by managers who think and act like owners.  We are prepared to act swiftly when such businesses in our circle of competence become attractively priced.  We are pleased with the investments we added this quarter, and we are excited about the current opportunity set, which is more interesting than it has been in some time. We are deeply grateful to be able to do this work on your behalf.