Money Wants to Reproduce
Warren Buffett of Growth Investing?
A Fast-Growing Emerging Markets Airline
When you think about money, what image comes to mind? If your mental image of money is Scrooge McDuck’s vault filled with coins and bills, you need to update your thinking, because money is actually among the most active substances on earth. Here’s why that makes a difference to you as an equity investor.
Money flows. It’s such a common phrase that it’s easy to take for granted, but money can actually jump on the Internet and be on the other side of the world before breakfast. Liquid assets—those not tied down in real estate, automobiles, collectibles, antiques, art and the like—are always on the verge of hoisting anchor and setting sail with the tide, although they do it at the speed of light.
And why does money flow? It’s because …
Money wants to reproduce. You can call it Wriston’s Law (you know, the one that says that money will flow where it is wanted and stay where it is well-treated) or you can call it liquidity or you can think of it as money trying to reproduce itself. After all, that’s what chasing higher rates of return is all about.
For the past three or four years, money has had a hard time finding any place to go that offered much more than stingy returns without taking on a big load of risk. The desperation to find some place to put money to protect principle went so far that some people were buying government bonds with a negative yield! That’s right. Some people bought bonds that paid less than nothing because every other asset class that offered more was just too risky for them. They preferred a guaranteed small loss to the risk of losing more.
This may be heresy for a growth investor like me, but I have to admit that, for people with a large fortune who are living off dividends and interest, it’s probably not a bad idea. If your fortune is too large to be protected by FDIC, there’s no place to hide your capital that doesn’t put it in the water with some kind of sharks. So it makes sense to choose the smallest sharks you can find.
But as a growth investor, thinking about the flow of assets always makes me think about the way money gets tempted out of its hiding places when a new opportunity shows up. In their time, index funds, tech stocks, REITs, hedge funds and ETFs have all been the new kids on the investing block, and they have attracted enormous amounts of money, pulling it out of old-fashioned bank accounts and out from under mattresses.
And, when money sees greater opportunity in stocks than in any other asset class …
Money flows power market rallies. During the S&P 500’s rise from 667 in March 2009 to above 1,500 today, the Index’s progress has been achieved by attracting money from other investment choices. During the month of January, for instance, the S&P 500 ran from 1426 to 1498. And that leap got its fuel from a net inflow to conventional equity mutual funds to $20.7 billion. This is the largest one-month inflow since the spring of 2000. And if you add in exchange-traded products, the number rises to $34.2 billion, the highest total since 1996.
The money that is gushing into equities, equity mutual funds, equity ETFs and equity hedge funds all has to come from somewhere. Lots of it is draining out of bond funds and bond ETFs as investors’ appetite for risk gradually rises. And plenty is migrating from money market funds and out of bank accounts, even out of Treasuries.
As you look at the chart of the rise of the S&P 500 from March 2009, you should see it as a barometer of investors’ perception of the stock market. And I hope you will appreciate once again the immortal words of Jesse Livermore, the legendary investor who said, “Markets are never wrong: opinions are.”
Money is continuing to flow rapidly into equities, and the best thing you can do is put some money into a boat and float along with it. As I’ve said before, bull markets are not so common that you can afford to ignore one.
Want help getting started? The Cabot Market Letter will give you all the advice, education and specific buying and selling advice you need to go with the flow.
Jesse Livermore is a well-known name at Cabot, the author of a couple of books on growth investing (or about his life, which is just about the same thing) that we have all read at least twice, and Mike Cintolo probably half a dozen times. But among the wider population, you could probably ask a football stadium full of people who Jesse was without getting a bite.
In fact, the only investor whose name would ring a bell outside the financial industry is probably Warren Buffett, the legendary value investor who cracked headlines in 2006 by giving $31 billion to the Bill & Melinda Gates Foundation.
It’s hard to overestimate the importance of a star investor like Warren Buffett to prospective investors. His success, his low-key likability and his generosity make value investing look very attractive.
Stars are just as important to investing as they are in sports. Joe Namath helped to raise the profile of the NFL in 1969, just as Arnold Palmer did for golf (and Tiger Woods, in his turn), John McEnroe did for tennis, Wilt Chamberlain for basketball and lots of stars in recent years. A big sports star inspires kids to pick up the same equipment and adults to park their bums in front of televisions to watch.
I wish I could say that there’s a growth investor who has the skill, personality and media savvy to do for growth investing what Buffett has done for the value style. But there hasn’t really been a breakout investor with the potential to cross over to mass popularity since Peter Lynch rode his huge success managing the Fidelity Magellan fund from 1977 to 1990 to gains that averaged 29% per year.
Since success at growth investing requires the cooperation of the market, I guess it’s no accident that the style hasn’t produced a big star in years. Two big crashes and many smaller bear runs can take the shine off any investor’s halo.
The market we have right now is the strongest in years, and that’s what we need for the next star to emerge. But for now, you’ll have to be the star of your own show.
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I have my eye on a Panamanian airline company that has shown years of steady progress and is now pushing out to new highs on good volume.
The company is Copa Holdings (CPA) and it’s a Panamanian airline, founded in 1947, that serves much of Central and South America from its hub in Panama City, with connections to the entire world through code-share agreements with United Airlines. The company now has 280 daily scheduled flights to 63 cities in 29 countries in the Americas and the Caribbean. Copa is primarily a passenger airline that has been growing quickly as the region’s economy gains momentum.
The company grew revenue by 29% in 2011 and has averaged nearly 25% growth so far this year, with a healthy 16.5% after-tax margin in its latest quarter. Another good sign is that the company’s stock pays a handsome dividend; the trailing annual dividend yield is 4.0%.
Copa is increasing the number of routes it serves, taking advantage of favorable load factor trends to strengthen its hold on the Central and South American market. Its fleet of modern Boeing and Embraer planes is standardized and well-maintained.
Another point in Copa’s favor is CPA’s favorable 15x P/E ratio. Copa will report its Q4 and 2012 results after the market closes on February 6, which is tomorrow. As usual, the most important thing won’t be the specific revenue, earnings and margins numbers, nor even the trend of those numbers. The big thing will be to watch what CPA does after the report. A gap up or push higher on strong volume will be the signal that investors are ready to buy more CPA. We don’t advise buying ahead of earnings reports, but jumping in early after investors push a stock higher is often a good way to proceed.
All the best,
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory