Investment Fundamentals: 3 Illusions and What To Do Now

As the investing month of October mercifully draws to a close, there is now a palpable sense of calm in the financial markets.  While the horrific damage – in both value and psychological terms – is very, very real, and may take years from which to recover, there has been a healthy mindset transition to a “what is to be done” thinking, feeling and acting.

Let there be no illusions, however, that things will ever again be as they once were.  To succeed, investors must let go of beliefs and strategies that are no longer serving them nor are applicable in these restructured markets.  

Foremost among these are:

1. That the Federal Reserve Can and Will Save Us

The glory days of the stock market responding puppet-like to monetary easing are gone, gone, gone.  With the federal fund rates now at an incredible 1%, the Fed no longer has any place lower to go.  Far more fundamentally, the last few weeks have been filled with “the emperor has no clothes” watershed moments for Mr. Bernanke and his fellow string-pullers.  Quite simply, both the equity and the debt markets no longer trust the Fed to save them like they once did.  The markets have spoken loudly that “trying to pay the left hand with the right hand” does not address in any manner the fundamental value challenges of the underlying assets.

2. That Wall Street Will Rise Again

For better or worse, the prestige, respect, and trust of Wall Street as the capital of the world’s financial markets has been shattered, probably beyond repair.  This has been a true perfect storm.  The most gilt-edge names on the Street have been forced to ask the government to bail them out (at great hypocrisy to core capitalistic, free enterprise principles), fail spectacularly, or seeing such precipitous drops in their securities’ values, call into question the basic viability of their business models.  

On some level October simply brought to a rushing head the technology, globalization, and regulatory trends that have been percolating for many years, and drove the “center” of the action out to the “edges.”   The amalgamation of those edges is the brave new financial world – hedge, sovereign wealth, and private equity funds, and China and the petro-dictatorships increasingly being the lenders of last resort.  Phew!

3. That Real Estate is (was or will be) The Answer

Like in all bubbles, once they are over it is quite easy to look back and say “How could we have been so foolish?”  While real estate is sometimes value-creating – as when it supports business-building objectives like research and development, better corporate productivity, and general efficiency gains via providing space to combine enterprise/business units – at its essence it is either a flat or naturally depreciating asset class. The fantasy that “the box” in which one resides, without capital improvement, will increase in value any real terms, on a sustained basis beyond population growth, has been by far the biggest cause of the current financial mess.  It will be years, if not decades (and maybe not in our lifetimes) that we will see meaningful, non-capital improvement-based investment return on the real estate asset class.

“We will either find a way, or make one.” - Hannibal

Really the only good thing about markets like these is that they force us to look inward, to distrust the hype, and to try to understand what the core drivers of capital appreciation really are.   

And since time immemorial, they can be summarized in one word:  Fundamentals.

• Before value can be traded, distributed, or re-distributed, first it needs to be created.
• Creating value can only be done via the fundamentals – namely designing and executing upon systems and technologies that allow more (and better) products and services to be created and consumed.
• NOTHING that has happened in this last two months alters this principle.  In fact, the credit and stock markets correction was in essence a mass realization that the fundamentals underlying the securities we were all holding were by no means what they were claimed to be.

At Growthink, our business is to two-fold:

1) To advise companies that are building fundamental value, and

2) To provide high-quality, pre-screened deal flow for investors and strategic buyers seeking to invest in fundamental value. 

Each year, we review hundreds of private company investment and acquisition opportunities and share those with the best management teams, market opportunities, and financial prospects to our network of investors.