Longer term we see inflation as a distinct possibility and are already considering implications on the portfolio. Inflation may be the easiest way to reduce the debt burden politically. However, the economic cost could be significant. A steepening yield curve and a record high gold price are indications that we are not the only ones with this concern. Even though inflation might be more detrimental to several other asset classes it is not good for equities in general.
First, during inflationary periods market multiples overall tend to be lower than during periods of relative price stability. Second, and counter to what many believe, profitability does not improve with inflation. We believe that the companies best able to protect their earning power during inflation are the ones with true pricing power. Stock picking in an inflationary environment is even more crucial to generate real wealth.
After three years where the market was dominated first by momentum investing, and then by panic, we found that stock selection once again began to matter in 2009. With our continued focus on the earning power of individual stocks, we are confident our results will reflect the value inherent in our holdings. In addition, we feel comfortable in our ability to take advantage of new opportunities. |
