Warren Buffett famously quipped: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” At The Ross Group, we hold this quote to be an absolute. We spend much of our time identifying "wonderful" companies that merit investment. We investigate balance sheets, review underlying statistics such as dividend growth, return on invested capital, and free cash flow generation, and analyze a company's long-term investments to ensure financial well-being. Importantly, we want to confirm that a company’s future will be as successful as their past. However, our dilemma today is not a lack of fantastic businesses. Rather, it is the ability to pay a "fair price" for many blue-chip companies that gives us pause. We believe many excellent businesses today trade at excessive valuations, and our team is willing to be patient to buy those great businesses at good prices.
Today's market environment reminds our team of the late 1960s and early1970s where a group of businesses, coined the "Nifty Fifty," ruled the day. The term referred to a group of roughly fifty blue-chip companies that were "must own" stocks regardless of their underlying valuation. They all traded at incredible premiums to both the market and their peers, and these fifty stocks are credited with propelling the bull market of the early 1970s. However, these businesses subsequently declined and underperformed through the early 1980s. They did not fall because of a failure of business model or success; rather they underperformed as their excessive valuations returned to historic norms. The Nifty Fifty is an example of what can occur when investors ignore fundamental stock valuation metrics and instead invest based on emotion.
As long-term investors, The Ross Group does not focus on an investment return over the next year. Instead, we are fixated on the next decade of returns. As we navigate the current market environment, we want to be cognizant of history and the pitfalls that have befallen investors. The market never reacts in the exact same way it has historically. But in times like these, we remind ourselves of the famous quote by Mark Twain: “History doesn't repeat itself, but it often rhymes.”