When it comes to investing for the long term, the overriding factor that will determine future investment returns, other than time, is the value of the asset at the time you buy it. Think back to the early part of this century (the technology bubble). If you had decided to invest in late 2000 in the broad US stock market, you would have spent the last 13 years hoping to get back to break-even and most likely gone through a number of bottles of TUMS.
I have spent the last 18 years as an individual focused on determining the value of various investment assets. Over that time, it has become crystal clear that over short and possibly even intermediate time periods, value is in the eye of the beholder. As with any freely traded asset, the current value is derived from the current participants in the trade. It may not be clear what is driving their thoughts on the underlying value but what is clear, at least to me, is that it is decided by their current priorities, their assumptions around the future, and most importantly their emotional state. Because of this, there are too many variables to derive a single stable number that represents the value of an asset.
That’s why Auour has adopted, as many participants have, a belief that the value of an asset is more a spectrum of values. By looking at the varying drivers of a company, asset class, or market, one can gain a level of understanding of the range of values an asset carries. And with this information, an analysis on the potential return (to the high end of the spectrum) and the potential risk (to the low end of the spectrum) can be performed and used to form an investment decision.
Its a respect for the various outcomes and an appreciation for the current market participants’ needs that can assist in discovering opportunities and risks. By having a longer term investment horizon, our focus on the material drivers to valuation provides us the opportunity to weather storms with more confidence and take advantage of discontinuities as they occur.