When I was young my Mom always told me, “If you don’t have anything good to say then don’t say anything.” When we started writing these Insights in the midst of the financial crisis I made a promise: We would only send an Insight out when there was actually something worth writing about. Some have asked why we have not sent an Insight in a few months; well, there really has not been much to say.
There is a lot of noise; there is always plenty of that, but there has not been much news. That could change next week. The citizens of Great Britain get to decide whether or not they stay in the European Union. The media has deemed this the Brexit. The markets, which have ignored this story for months, have all of a sudden decided to pay attention. Polls in recent days suggest the vote may be closer than people previously thought.
If this story sounds somewhat familiar it may be because we had the running saga of Greece and its referendums. Should they leave? Should Germany kick them out? Closer to Britain we had the vote of Scotland to decide if they wanted to leave Great Britain. Based on the underwhelming popularity of our two Presidential candidates I would not be surprised to see this episode play out in the U.S. I still remember when Key West tried to become its own country.
The story is the same every time. People think that the vote really won’t be close, after all staying is a no-brainer. The polls then show the vote is closer than originally thought. Panic sets in – lots of people evidently do not have brains! – then the real vote takes place and it turns out as expected. People with brains win!!
Here is the problem – it is a little like the boy who cried wolf: Every time he did it, people got less and less scared until the real wolf came and no one helped. If we keep having these votes, eventually those who wish to sever ties with the rest of the world will win. I seriously doubt that happens next week, but what if it does?
There have been countless events that have been billed as the end of the world and yet we are still here. Britain leaving the EU will not cause the planet to spin off its axis; in fact, its impact will probably be smaller than most might think. There will be short-term trading headaches, but European companies will still want to sell goods to Britain and those things will get worked out. The fear is more about the potential domino effect. What if France is next?
We believe that fear is overblown. So overblown that Germany now has negative interest rates. If one wishes to loan money to Germany today, then they will get less than 100 percent of their money back. Japan has been that way for a while now and this week, with the fear of the Brexit, Germany has joined them. This is not a healthy environment; it is not good when investors willingly sign up to take a known loss. The only rational reason to do this is that one believes that he will lose more in any other investment over the next 10 years. That is an incredibly pessimistic assumption.
In a world like this it becomes all the more important to invest prudently. That means from the bottom-up. There is always something on the global geo-political stage that threatens long-term economic growth, but that doesn’t mean Apple will sell fewer iPhones, or that Coke will sell fewer drinks, or BMW fewer cars.
At Iron Capital we don’t invest in markets or in countries or in economic and political unions. We don’t bet on political unions staying together or breaking up. We invest in companies – companies that sell products people need and want regardless of whether or not Britain is part of the EU. The Brexit, if it even happens, will cause some volatility but it will not change the long-term viability of any of the companies that we own, directly or indirectly through mutual funds.
Investing is hard not because it is complicated. In truth it is very simple. It is hard because there are so many distractions, so much noise. I hope you understand why we have been hesitant to add to that volume.
Warm Regards,
Chuck Osborne, CFA
Managing Director
