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To take this back to the SCV discussion, because it wraps up the distinctions in the positions very neatly, compare this quote with MJG's last post:We believe, and have to date demonstrated, that the best ex-ante indicator of low forward absolute risk is found not by studying historical market price data, but through the study of corporate profits. This harks back to the way in which Ben Graham talked of risk. He argued that real risk was “the danger of a loss of quality and earnings power through economic changes or deterioration in management.”
Following this logic would argue for a portfolio constructed of companies with high and stable profits, which should, by controlling “real risk,” result in low and stable “price risk.” Hence one needs a framework for identifying future corporate profitability.
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Standard orthodoxy such as the positive relationship between leverage and profitability is demonstrably backwards. Contrary to modern corporate finance theory, higher returns to corporations and equity holders result from unassailable corporate moats, not from corporate leverage. This is the world as described by Warren Buffett, not Modigliani-Miller.
At the end of the day, the returns (or lack thereof) earned by stock investors are entirely a function of the underlying corporate profits of the stocks held in a portfolio. The exchanges offer no more than a pass-through of earnings to investors. In the absence of earnings, there will eventually be abysmal returns and no dividends. If there are earnings, any price volatility will ultimately net out, delivering those earnings to investors with a long-term time horizon.
This argues strongly for a risk and investing framework focused on the survivability of corporate profits under any scenario. Companies with high and stable profits do not go bankrupt. Companies with exceptional profitability generate exceptional returns. Likewise, those with low profits will fare poorly
See how these two theories of outperformance are saying exactly opposite things?Small size often makes the company more vulnerable to unexpected perturbations. Typically their product line is more focused and not as diverse as a Large firm. Another risk factor is that growing businesses are often not geography dispersed. Their marketing is regional, not international, so localized disturbances more directly impact their sales.
The accessible funding line for these smaller outfits is more fragile with lower reserves and less access to loans and at higher interest rates when they can be secured. Large companies have survived their growing phase and are more stable; smaller firms are more subject to business model failures and exogenous disruptions (a new competitor or invention) with bankruptcy a higher probability.
And I thought 5.75% load was bad.Versus Capital Multi-Manager Real Estate Income Fund...The fund’s retail, F-class shares carry an annual expense of 3.30% and a 2.00% redemption fee on shares held less than one year.
I love this business.Stephen Leeb wrote The Coming Economic Collapse (2008). The economy didn’t, his fund did. Leeb Focus Fund (LCMFX) closed at the end of June, having parlayed Mr. Leeb’s insights into returns that trailed 98% of its peers since launch.
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