Letter to RVW Investors
Summer - 2012
We have consistently believed that stocks are undervalued and that despite anticipated ongoing volatility, equities will end this decade significantly higher than they are now.
The larger companies as a group have an earnings yield of over 7%; a far higher yield in relation to prevailing interest rate levels than is typical. If we add a conservative 1 - 2 % real growth rate to that number we arrive at a possible appreciation factor of 8 -9 % annually over the longer term for our equity portfolio. Even if the global economy is stagnant we may see returns of up to 7% compounding over the long term. (Of course if earnings multiples expand, returns could even exceed these ranges).
Although short term stock market pricing is driven by the passions of fear and greed, long term equity valuations are determined by the underlying profitability of the 5000 great businesses we're invested in. At RVW we use a "Darwinian" rules-based stock selection model to access groups of superior companies - using ETFs, which are tax-efficient and low cost.
Our overweighting towards the large well known global brands is driven by the following factors:
We have consistently believed that stocks are undervalued and that despite anticipated ongoing volatility, equities will end this decade significantly higher than they are now.
The larger companies as a group have an earnings yield of over 7%; a far higher yield in relation to prevailing interest rate levels than is typical. If we add a conservative 1 - 2 % real growth rate to that number we arrive at a possible appreciation factor of 8 -9 % annually over the longer term for our equity portfolio. Even if the global economy is stagnant we may see returns of up to 7% compounding over the long term. (Of course if earnings multiples expand, returns could even exceed these ranges).
Although short term stock market pricing is driven by the passions of fear and greed, long term equity valuations are determined by the underlying profitability of the 5000 great businesses we're invested in. At RVW we use a "Darwinian" rules-based stock selection model to access groups of superior companies - using ETFs, which are tax-efficient and low cost.
Our overweighting towards the large well known global brands is driven by the following factors:
| • | These companies have unprecedented cash reserves – we estimate that the Fortune 500 companies have $2 trillion in liquid balances (which is more than the reserves of most countries) and can weather economic storms; |
| • | They have a diversified global economic footprint which means they do business in multiple environments; |
| • | They provide currency diversification and are a hedge against a falling US $; |
| • | Historically, quality equities protect against inflation because these companies can usually pass on increased costs to their customers; |
| • | Many of them pay attractive dividends, on which unprecedented numbers of retiring baby boomers will be relying for their retirement; and |
| • | As 1 billion new consumers come to the marketplace as consumers for the first time over the next decade in the newly developing countries, we expect they will purchase many of the products that are consumed in our market – the McDonalds, Cokes, iPhones /iPads, and the branded cleaning and beauty products. |
For those who can endure the market turbulence which we anticipate, we are confident that the rewards over time will be significant – after all history is solidly on the side of the bulls. As always, we use a diversified group of secure bonds where needed for shorter term stability and interest income. Each portfolio reflects an allocation that is appropriate to the risk tolerance of the client and reasonably expected cash needs.