Slow and Steady Really Does Win
09/18/2012 8:30 am EST
Looking past the fits and starts of short-term trading and investing has some very salutary benefits for investors, writes Jeff Auxier of Auxier Asset Managment.
Gregg Early: I am here with Jeff Auxier, president and CEO of Auxier Asset Management and the Auxier Focus Fund (AUXFX).
Jeff, one of the things that you have been talking about and mentioned in a recent Fortune article where you were featured was that deleveraging across the globe has brought about certain opportunities in certain sectors. Could you tell us more about that?
Jeff Auxier: Yes. The first thing, Gregg, is we want to look at the balance sheet of the businesses we're in, but also in a macro environment and where we are in debt levels and the stages of deleveraging.
So the developed countries of Europe and US and UK are in a period of deleveraging-basically, excessive indebtedness has led to a period, probably the next seven years, of painful cutbacks. That is a period that leads to people buying necessities, and we like the lower-ticket necessities at this time, generally.
Gregg Early: So you're looking at the developed markets where their consumers are moving down the scale as opposed to up the scale. They are buying their necessities, but they might not be buying a sub-zero refrigerator.
Jeff Auxier: Yeah. Well, there are two kinds of stories going. The first one-that's a lot more exciting-is you've got a 1.8 billion-person emerging middle class now, and we're adding each year 150 million people to that middle class.
Again, in these countries, this urbanization that is taking place, and also this is the most rapid urbanization industrialization in history in Asia. So the necessity in the food part of that growth is three times faster than the overall economy. That is the exciting deleveraging.
In other words, that is not really a deleveraging story. That is one where you are actually moving up. And that group is spending between $10 and $15 trillion a year. So if you have companies that can sell into that-there's 200 million Indonesian fundamentals or 200 million people there. It's far more exciting than, say, Greece. But if you're in the developed countries, again, the lower-ticket items in a deleveraging tend to be better.
Gregg Early: So you're saying that in a developed nation, people might not go out to eat, but they might go buy a pint of Ben and Jerry's. And in an emerging market, people will go out and buy a pint of Ben and Jerry's, because now they have the money to be able to do it.
Jeff Auxier: Yeah. The big thing in Asia...a lot of it is just the trust-food, safety, and what have you-in Western brands; if you have a trusted Western brand-and a lot of the Unilever (UN) brands or what have you have been very exposed to the emerging markets as far as their distribution goes.
The big thing is if you can develop a quality trusted Western brand that's a little lower-ticket, that's where we're seeing strong fundamentals throughout the globe.
Gregg Early: You've been a proponent, and continue to be with the fund as well, which is highly successful; but instead of going for the Ferrari kind of eye candy, you stick with solid companies and sort of a "slow and steady wins the race" philosophy. Is that correct?
Jeff Auxier: Yeah, because the most underappreciated concept in investing, I think, is the power of compounding.
And the key there: you just don't want to lose your capital. Because if you're up 50% in year one, and you're up 50% in year two, but you're down 50% in year three, a steady 8% beats that. But if you're down 50%, you've got to go back up 100%.
With your steady compound interest then-you know; the eighth wonder of the world according to Einstein, or whatever-you really focus on making sure you protect against permanent capital loss.|pagebreak|
Now and again, in all auction markets, there is going to be volatility. The average New York Stock Exchange stock fluctuates 50%. But you're looking at permanent capital loss through changing technology and things-bad acquisitions, performance, bad allocation by management, etc-you're always on the lookout for those things that can torpedo your portfolio. That's why if you can avoid the torpedoes and the bubbles, you will outperform over the long haul.
Gregg Early: Are there a couple of stocks that you like right now? I know that even in, say, the consumer staples sector, some of these might be overvalued at this point. What are you looking at now that is attracting you?
Jeff Auxier: Well, unfortunately now you've got to buy some problems because the markets have moved up. But we like Tesco (TESO); we'd buy at lower prices, but Tesco is very much levered into that emerging middle class, primarily on the supermarket side, in Korea and Asia. They're also big in the UK.
[It has] a 4.5% dividend yield; nine times earnings, and it stumbled badly in the first quarter. But again, we're looking at those franchises that typically will stumble.
Tesco overextended similar to what McDonalds (MCD) did in 2002, and then a couple years ago Starbucks (SBUX) as well...too many stores, and they lost focus on their customers. Now they are getting back, so their retrenchment has been a good time to accumulate the stocks.
Like I say, a lot of things have moved up, so we're very price sensitive. But we've got a fair amount of things like Molson Coors (TAP). Molson has been around since the 1700s; the oldest brewer in North America. We first got in in the low $40s, high $30s; ten to 11 times earnings. And again, the Coors management has been very innovative and coming out with a lot of new craft brews and stuff like that.
We look at ticket sizes-again, in a harsh deleveraging, you're in demand. We don't want to be in windmills or solar or something that is dependent on tax credits. We want products where people buy them because they want to buy them. They're not forced to buy them, and they're not buying it because there is a subsidy-a housing subsidy-or interest-rate subsidy.
Gregg Early: And they don't have to get approval-loan approval-right?
Jeff Auxier: Right. We want to just...people want to buy products that, they really want to buy them; they're affordable. Kind of like affordable luxury.
We talked about Ben and Jerry's Ice Cream. Something that they can buy, maybe a cup of coffee-a nice cup of coffee. They're not going to buy a Maserati or something stupid.
They'll do that over-and you add it up-on people who are aspiring to buy Western products. And if you've got a trusted brand, you've got to have the scale to serve-in this urbanization, there are a lot of people that are moving into these urban areas, and you've got to have the distribution. So that's what's been exciting.