Monday, November 10, 2008

The Hidden Value of Dedicated Hearts And Minds

By Randy Alsman, VP and Portfolio Manager The bear market of the last year coupled with the seemingly spasmodic daily jumps and falls in price have shaken the confidence of many investors. Many days it seems that logic has left the building, with apologies to Elvis fans for borrowing the phrase. Also, people caught up in the visible market’s gyrations can lose sight of what the market really represents. A brief refresher might help restore faith in long-term investing for at least some of you. The stock market is nothing more than a place for centralizing and organizing the exchange of value. One part of that exchange is most often money…cash. That’s the visible part if you will. The other part of that exchange is equally, if not more, important. That other part, sometimes lost in the drama, is ownership. In the case of the stocks that we focus on, it’s ownership of some very high-quality companies. More specifically, shareholders own parts of tangible, and even more importantly, intangible assets. Obviously, buildings, equipment, inventory, etc. are some of those assets. And they have real and often significant value. But down yet another layer, shareholders own the most powerful and valuable of assets – ideas. Those ideas can be comprehensive and formal, such as patents, copyrights, and brand equities. A powerful new drug, a more energy efficient jet engine, a brand name that evokes high quality, are all intangible assets that can generate billions in revenue and profit. Equally or even more powerful are the smaller, daily ideas of thousands of employees trying to figure out how to better serve customers, outsmart competitors, or do their job more efficiently. In the best companies, job candidates are screened for their ability and tendency to think that way. Once they’re hired, millions of dollars are invested in training them to get even better at those thought processes and how to act on them more effectively. None of those intangible assets are much affected by short term stock market moves. Think about yourself, you go to work every day with some part of your brain trying to figure out how to do something better, earn a promotion through superior results, stretch your department’s budget to accomplish more with less, etc. Often, a setback on a project or a market downturn actually can cause you to work even harder for great new ideas. Those intangibles are the most powerful assets owned by an investor in a high quality company…the hearts and minds of thousands of talented, motivated people working every day to create more value. They can be defeated, and some of them are each day. But far more are finding new and better ways to win. When they do, they add to their small part to the larger total value that their shareholders own. When the market and the economy go through their down times, don’t lose sight of what a long-term investor in great companies actually owns. He owns a powerful force that does not accept permanent defeat. In total, across a portfolio of top companies, those hearts and minds have always found a way, and I think they always will. Hearts and minds may be the most powerful argument for taking the long view when investing. Temporary defeats may grab the headlines. The best employees of the best companies, however, never stop trying…and then they succeed. Those successes are often not directly reflected in stock prices over a few days, weeks, even over many months. But, for those who take the longer view, those accumulated victories have been rewarded handsomely.