One person that the New Low Observer team truly admires in the world of investing is Robert Rodriguez. Mr. Rodriguez had an investment strategy that is very close to the approach that we have employed by examining quality stocks near a new low. The beauty of Rodriguez’s work is that he has an unparalleled investment record in the realm of small and mid-cap companies. From my perspective, there are so many challenges working against companies with a market capitalization of $1 billion or less. However, Rodriguez made it look easy even though we’re certain that it wasn’t. According to GuruFocus, during his time as the manager of the FPA Capital funds, Rodriguez “…has achieved an annualized return of 16.91% as of 9/30/2007. In the same period S&P 500 has returned 13.17% annually.” (related FPA performance data)
In the Letter to Shareholders dated September 30, 1994 (PDF), Rodriguez says a couple of things that I feel are worth repeating. In the first excerpt, Rodriguez compares the market declines of 1987, 1990 and 1994. Rodriguez speculates as to the reasons why 1994 was different from 1987 and 1990. He mentioned that in 1987 the stock market crash was due to computer selling while in 1990 the prospect of war became a reality.
In 1987, Rodriguez thought that the ability to make the decision to sell stocks was easy. The unfamiliarity of computer selling made the choice to sell academic. Likewise, the prospect of war in 1990 was clearly bad so selling stocks wasn’t an issue for average investors.
According to Rodriguez, 1994 was different because of the following:
“The Fed has shifted to a tighter monetary policy. Interest rates are rising while inflation fears are growing. Will these factors lead to a possible recession in 1995? All are situations that most investors have faced before; therefore, they have created a longer period of investor uncertainty.”
This leads Rodriguez to conclude:
“In this type of an environment, an individual stock’s characteristics tend to play a greater role than any one single event. Stock picking has a potentially higher probability of being a successful strategy and this is where we feel our strength lies.”
My thoughts are that when compared to a market crash or a war, the prospect of a recession is a 50/50 proposition. This causes investors to waver as to whether they should buy or sell stocks. Undecided investors cause the market to become range bound allowing for companies to collect earnings that, in turn, builds value into the price of the stock creating unique value opportunities. This is not unlike the current investment environment where there market has fluctuated in a range due to the agonizing over the threat of a “double dip” recession. Whether a recession materializes, occurring shortly after a small uptick, is a topic for another day.
Rodriguez ends the September 1994 Letter to Shareholders with a quote that can’t be beat:
“Thank goodness we focus on individual stocks rather than trying to forecast the stock market. The former is far more rewarding and predictable.”
This last quote by Rodriguez explains why the New Low Observer team places so much emphasis on individual stocks rather than mutual funds, index funds and ETFs. With all of the aforementioned products, if a selling spree ensues, the fund can decline despite the quality of the holdings.
- Hand wringing over the threat of recessions helps to create value in the market.
- Individual stocks, not funds, have a greater probability of generating higher investment returns.