AMERICAN EXCEPTIONALISM
As a fundamental investor, I have always espoused that successful investing is not complicated. Historically, corporate America has generated an annual earnings growth rate of 6% (driven by the wants and needs of society), 2% inflation (the ability to raise prices), 2% demographic growth (producing more consumers), and 2% productivity growth (doing more with less-thanks to technology), which has given us an 8% to 11% annualized return in our stock portfolios. But given our free markets, Wall Street likes to make investing complicated playing on our emotions by selling products that enrich the middleman and garner mediocre returns for the consumer. If you truly want to achieve attractive long-term investment returns you need to remain focused on the sound fundamentals of investing in free cash flows that the capital markets provide and keep the middleman of Wall Street products out of your portfolios.
The article “Don’t RSVP to This Private Party” featured in the WSJ Saturday/Sunday addition dated December 21-22 is a good read reminding us of Wall Street’s deceptions.
Beware of the sales pitch, “We really want to lean into private placement.” You will subject yourself to capital calls, less liquidity (particularly during downturns), less transparency and less cash flow. We are embarking on one of the greatest economic expansions ever to develop. Driven by a new steam engine, a new superhighway - quantum computations expanded by Artificial Intelligence. AI is impacting every facet of manufacturing, design, medical care, pharmaceutical development and most importantly overall productivity and yes even war. For those of you waiting for World War III to start, update, it started in August 2008 with Russia’s invasion of Georgia. As concluded by the book “An Empire of Wealth” by John Steel Gordon, War even as destructive as it is, is stimulative to the world economy. So don’t let the naysayers play on your emotions and hedge against the exceptionalism of America as geopolitical events unfold. That is not to say that we will not have serious challenges ahead or a recession or market corrections at times; what I am saying is that it is our innovation and grit that has had the most impact on generating attractive returns improving the human experience. We live in the greatest country in the world, and it is our freedom that drives our creativity and success as a blended people. American exceptionalism will continue to drive the economy in peace and during times of war. I heed the advice of Charlie Munger, Warren Buffets righthand man, “Do whatever you have to not to interrupt the compounding of investment returns.”
Commentary Disclosures: Covington Investment Advisors, Inc., prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.
Covington Investment Advisors, Inc., uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.