Our Core Investment Principles
Stock prices soared higher the past two years. What should we do now?
The stock market return was robust last year for the second consecutive year. The S&P 500 index total return of 25.02% in 2024 followed the 26.29% advance in 2023. Back-to-back annual gains exceeding 25% have occurred only three other times since 1928, most recently in 1997 (33.36%) and 1998 (28.58%). While these substantial returns are pleasant, they unfortunately tell us nothing about what lies ahead. With stock prices at all-time highs, many investors are wondering if the stock market can continue its strong advance. The answer is, in short: No one knows with certainty.
The beginning of a new year is when Wall Street pundits make their initial predictions about stock market returns for the coming year. Some are bullish, some are bearish, and most will prove to be incorrect. We think the events of the past five years are conclusive evidence that the future is unpredictable, especially in the stock market. As noted economist John Kenneth Galbraith said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With this being the case, what should investors focus on today? We believe that how we think and how we act as investors are much more important and productive than making unreliable predictions about an unknowable future.
How We Think
Investment is most intelligent when it is most businesslike. …Every corporate security may best be viewed as an ownership interest in, or a claim against, a specific business enterprise.
Benjamin Graham, The Intelligent Investor
The core foundation of our investment philosophy is to always think and act as long-term business owners in our approach to investing in equities. We seek great businesses with durable business models, intelligent and honest managements, healthy and productive corporate cultures and valuations that are at least reasonable if not deeply discounted. We invest in businesses with the intention of holding them for 10, 20 or even 30 years in order to experience the powerful benefits of long-term compounding.
With this multiyear mindset, assessment of risk is always job No. 1, and we attempt to minimize the risk of permanent loss of capital in all investments we make. There are no riskless investments in the stock market, but by stacking the odds of success substantially in our favor, we attempt to mitigate the risks inherent in common stock investing.
Our focus is on the intrinsic values of businesses rather than their stock market values. Intrinsic values are determined by long-term business results and cash flows, while market values are determined by stock prices. Stock prices can fluctuate wildly and irrationally in the short and intermediate term, but it is underlying intrinsic value growth that is the primary driver of longer-term investment performance. We view short-term swings in the stock market to be a fickle popularity contest, while long-term stock price changes tend to reflect intrinsic business value growth.
Finally, we value independent thinking highly. It is critical that we think for ourselves and not just go along with what others think. The crowd is sometimes right and sometimes wrong, so we gain no advantage by following the crowd. There will be times that most other investors agree with us and times when they disagree. We attempt to be unaffected by what others think.
How We Act
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
Warren Buffett
Mr. Buffett’s quote on the importance of having the right temperament should be heeded by all investors, and we take it very seriously. A well-balanced temperament can prevent investors from making big investment mistakes at times of stock market extremes. These mistakes include selling during market declines due to fear and buying during ebullient markets due to “animal spirits.” We believe that sound investing should remain rational, objective and dispassionate at all times.
We study businesses and the people who run them at length to form our own judgements on the strength of those companies and their leaders. At no point do we allow emotions to enter the process. After making an investment, we endeavor to remain unemotional about the company’s rising or declining stock price. Instead, we attempt to stick to the facts as we know them and base our decisions entirely on business fundamentals. In his classic book on value investing, The Intelligent Investor, Benjamin Graham wrote “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” We let the data and reasoning guide our decision-making.
We always strive to act with focus and discipline in our daily activities. We focus on things that we can control and on information that is useful, and we spend precious little time on other, less productive activities. This disciplined process helps us tune out the noise of the crowd.
Furthermore, just as we always think like a business owner, we also try to act as one. Great business leaders are often patient when necessary, taking a very long-term view. Patience is a distinguishing and decidedly positive characteristic in the hyperactive trading world that defines much of Wall Street today. We always maintain a long-term investment horizon and have enough patience to allow a talented management team to work through any challenges that sometimes arise in business.
Executing Our Strategy in Today’s Stock Market
Emotions in the market swing from optimistic to pessimistic, back and forth, over time. Today, the stock market is priced optimistically. Over the last two years, market values have grown faster than underlying intrinsic business values. However, no one knows when today’s optimism will be replaced by tomorrow’s pessimism.
The current optimism is being driven by strong and enduring economic growth, expected future cuts in interest rates and potential productivity enhancements that artificial intelligence may provide for people and businesses in the future. Since no one can consistently time the market by accurately predicting stock movements, we think it is best to concentrate on our core investment principles – how we think and how we act – when executing our equity investment strategy. Today’s market conditions do not change this simple fact. Our strategy is one that can be successfully executed in all types of markets, from the most optimistic to the most pessimistic. Our belief in the ability of a carefully selected portfolio of companies to generate attractive long-term returns through full market cycles remains strong.
In The Intelligent Investor, Benjamin Graham also wrote that “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” We designed our investment philosophy and process – how we think and how we act – to give us the best chance to achieve superior results for you.
Thank you for continuing to place your trust in us as we help you achieve your investment goals. We pledge to you our very best efforts. And we wish you all a very happy and healthy New Year!
Baird Trust Company (“Baird Trust”), a Kentucky state- chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker dealer and investment advisor), and other operating businesses owned by BFC. Past performance is not a predictor of future success. All investing involves the risk of loss and any security may decline in value. This is not intended as a recommendation to buy any security and views expressed may change without notice. Baird Trust does not provide tax or legal advice. This market commentary is not meant to be advice for all investors. Please consult with your Baird Financial Advisor about your own specific financial situation.
