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Front-Running the Economist

In early July, Steven gave a presentation at the Value Investing Seminar in southern Italy, where he talked about the current investing climate which is stranger than fiction. Given today’s investment environment looks like a wonderland which only Lewis Carroll could have imagined prior to the most recent decade, the title of the presentation was Through the Quantum Glass, in deference to his great work Through the Looking Glass. 


This week’s Economist magazine talks about the current negative interest rate environment as one representative of Through the Looking Glass. Out of respect for the conference, we’ve not publicly share the slides, but instead we’re highlighting a few of the major points we’ve made with some slides below.

Capital intensive businesses are systematically shunned in today’s investing environment, which is odd since capital is essentially free. We suggested to investors that they should step Through the Looking Glass and embrace businesses that are trading anywhere from 2x (FCA) earnings to less than 10x earnings. These companies and even industries are fully pricing-in catastrophic conditions which we don’t believe will come to fruition. Embrace capital intensive business, as they are both the primary beneficiaries of a low cost of capital and the most attractively-priced in this Red Queen investing climate.

Beware, however, of businesses whose barriers to entry are solely reliant upon scarce capital or a special access to capital in order to keep competitors away. While Elon Musk could have never build a competitive internal combustion engine today (as he’s admitted), he also wouldn’t have been able to start Tesla if interest rates were at 10%. There would also be many slayed unicorns should capital become more scarce or demand higher rates of returns.

Full disclosure: our largest position is EXOR SpA, which owns a controlling stake in the Economist magazine.

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