September 2, 2023

BWP Outlook – Appraisals remain our North Star

“If you spend 13 minutes a year on economics, you have wasted 10 minutes.”
– Peter Lynch

During the 13 years from 1977 to 1990, Peter Lynch put together one of the best investment track records of all time by compounding capital at an astounding 29.2% per year. Those who invested $10,000 in the Fidelity Magellan Fund when Lynch took over, accumulated $279,520 by the time he retired.

While the times have certainly changed over the past 33 years, a strong argument can be made in favor of Lynch’s advice. Clients frequently ask our views on inflation, interest rates, and the economy. While we operate within the backdrop of economic forces, our team gets into trouble when we predict where the economy is headed, where interest rates might be six months from now or predicting the inflation rate. We won’t take you through the litany of predictions we (and most others in the investment community) made over the past year that turned out to be completely upside down. Humbling indeed…

Fortunately, we ignore macro-economic predictions and instead focus our attention on valuing businesses. Every time a company is acquired by another entity in the public market, we put it through our valuation model to check the accuracy of our system. Rapidly rising interest rates in 2022 posed a challenge for two reasons. First, there were very few transactions due to the uncertain environment. Second, all asset values are determined by prevailing interest rates, so lacking that real time feedback from actual transactions, we were flying blind. To compensate, we discounted our valuations until transaction flow picked up again.

Merger and Acquisition activity has since revived but, surprisingly, recent transactions suggest multiples being paid are not that much lower than 2021 despite the spike in prevailing interest rates. That simply may be a function of a lag in reaction time to the new paradigm. Regardless, we will continue to let actual transactions guide our valuations.

Our team’s only advantage is to follow great companies, conservatively value them and patiently wait until they fall to a significant discount to our appraisal. If we do this 30-to-40 times in a portfolio, eventually good things will happen.

We’ll close with another Peter Lynch quote: “The real key to making money in stocks is not to get scared out of them.”

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