Steak or Fish

Legendary chef Anthony Bourdain was one of my earliest inspirational figures. Entrepreneur, philosopher, and trailblazer—traits dear to my heart—Anthony is no longer with us, but his wit and wisdom remain timeless. His book—“Kitchen Confidential”—is an insider’s guide for passionate restaurant clients and other foodies, detailing the culinary world’s guts and glory and how the unseen work in the kitchen helps create the epicurean delights that arrive on your plate. As an ultimate culinary insider, Anthony warned: “I never order fish on Monday.”

With this in mind, if dining out on a Monday, you might be tempted to order the steak instead, even if you were craving fish. But steak or fish, and most other goods and services, are generally a means to an end, not an end in themselves, for clients seeking experiences and solutions. Investing is rarely the end in itself. It’s a means to achieve further comforts and enjoyments in life by generating an investment return in the form of money, which can then be spent to secure additional means and ends. In that pursuit, a common problem is choice—cash or bitcoin, stocks or alternative assets, time-tested or novel and promising, etc.

So, let me draw on Anthony Bourdain’s inspiration and combine it with my decade-plus experience studying and working in the investment field to share my observations on the choices and trade-offs available to long-term investors.

Money and Inflation

Given the news of late, we should start with money and inflation. Humankind invented money to facilitate transactions, a convenient form of exchange, so we don’t kill each other just to get something to eat. Money’s worth as a store of value, such as cash hidden in a mattress or earning little interest in the bank, tends to be as good as its backer government. Historically, the money of pretty much every country diminishes in value over time, to varying degrees, due to inflation, because governments of each issuing country tend to print way too much of it to pay ongoing government bills. Thus, money has historically been a poor store of value.

The Turkish Lira provides one recent example of how quickly money’s value can erode. Most of the world was probably too busy to notice that over the last ten years, Turkey’s money supply increased 7x. However, the Turks themselves have definitely noticed, as over the past 10 years, the value of the Turkish Lira relative to the U.S. dollar has declined by a factor of 7x-8x, a substantial hit to Lira-denominated savings. The U.S. dollar, historically considered a good store of value and a convenient medium of exchange, privileged as a world currency and accepted everywhere, has also been a victim of material devaluation. The average U.S. dollar inflation rate of 3.9% since 1970 does not seem like much, but it has cumulatively resulted in a decline of 88% over 50 years, or what could be someone’s lifetime. In practical terms, that bushel of wheat used to make baguettes and bagels used to cost about U.S. $1.2/bushel in 1970, versus U.S. $8/ 8/bushel these days. This shows that even the American government tends to help itself to the cookie jar a bit too often.  

Gold and Cryptocurrencies

Note: inflation is measured as CPI, per the U.S. Bureau of Labor Statistics.

Now, let’s consider gold and sentiment. Historically, gold has been considered a good store of value against inflation because of the relatively finite amount of gold that can be economically mined. Gold prices increased 50x over the past 50 years in U.S. dollar terms, from U.S.$35/ounce in 1970 to U.S.$1,800/ounce currently. The 50-year return looks especially impressive but is substantially skewed by gold’s meteoric rise during the 1970s, driven by investor demand amid rapid inflation at the time. Since 1980, gold has delivered a 3.3% average annual return in USD terms, not even keeping up with USD inflation. This proves that gold’s performance as an investment has historically been fairly inconsistent.   

We turn now to cryptocurrencies, which are the modern-day gold equivalent—you have heard of “Bitcoin” and “Ethereum,” right? Cryptocurrencies are meant to provide a defence against inflation by virtue of their somewhat finite supply, unlike the ever-growing supply of money. While inflation is currently approaching warp speed, the challenge with cryptocurrencies, as with gold, is determining their intrinsic value. For example, investors who bought gold in the late 1970s for $500-600/ounce saw their investment gradually and oh-so painfully decline by half in value over the subsequent two decades, ending at about U.S.$260/ounce in 2000. That robust gold demand during the 1970s was driven by people trying to protect their savings against the then-rampant inflation. However, when inflation concerns subsided, so did gold’s price. It’s hard to put a value on the value of gold or cryptocurrencies unless one merely assumes that it will go up because it will go up.

Equities and Their Management Teams

This leaves us with equities and the management teams that help drive the share-price values of their company’s publicly traded stocks. Historically, one of the most predictable and effective ways to consistently compound wealth has been through business ownership. The underlying premise of value accumulation through business ownership is the cash flow it generates. Throughout history, human ingenuity and entrepreneurship have enabled companies to consistently create tangible value, improve society’s living standards, and, as a result, generate profit for owners.

A significant challenge of being a part-owner of such companies through stock ownership is that you have to rely on the competence of their boards and management teams. All too often, a management team slips on its own banana peel, substantially hurting the business’s value in the process. Take Nokia, for example, the revolutionary mobile phone developer and manufacturer that at the peak of its dominance in the mid-200s had just under 50% market share of the global smartphone market. As per the analysis by Technical Science and Fortune, Nokia’s N95 smartphone was considered technically superior to Apple’s first iPhone. Yet, Nokia made a series of managerial, strategic, and execution mistakes that practically disintegrated the company. Nokia’s board of directors appointed Olli-Pekka Kallasvuo as CEO in 2006. A lawyer by training and a chief accountant by profession, Kallasvuo was responsible for managing engineers, who tend to approach problem-solving differently. He focused on efficiency and costs in an industry that competed on technological innovation. He was a political leader who prioritized top-down control over Nokia’s culture of creative collaboration. Olli-Pekka Kallasvuo did manage to reduce costs and substantially increase profits, but essentially stifled Nokia’s ability to innovate, which had been its strong point. Thus, Nokia lost its competitive effectiveness due to management and ultimately lost its relevance and customer base.

The causes of Nokia’s boom-bust were summarized by David. J Cord’s post-mortem book: “The Decline and Fall of Nokia”, based on multiple interviews with Nokia employees and D.J. Cord’s industry analysis: “Nokia had all the right pieces and all the right competencies, but they couldn’t put them together. This was down to the incompetence of top management.” Unfortunately, financial history books are filled with too many stories of great companies, like Nokia, that dug out and stepped into their own graves due to misguided management strategies and misplaced focus.

If history is a guide, companies, when prudently selected and effectively managed, are likely to continue generating attractive returns for investors even during periods of significant inflation. One of the oldest investments we’ve held for clients has been TD Bank, which remains one of our top holdings in the Mawer Canadian Equity portfolio to this day. Mawer was founded in 1974 to help its clients manage their investments during a period of substantial macroeconomic and geopolitical uncertainty, marked by high inflation. For perspective on what a fairly boring but consistently performing and well-managed business like TD Bank can deliver for long-term investors, consider that an ownership stake in TD Bank since 1974 increased the current value of $1 invested, with dividends reinvested, to $800, generating a 15%/year average investment return. A crucial component investors need to monitor in the investment process is the effectiveness of management in their invested companies—what exactly is management doing to ensure the company will continue to thrive and compound wealth for investors?

Insiders Highlight Insights

So, in conclusion, steak or fish? Both could be a fine choice. Anthony’s advice to refrain from ordering restaurant-prepared fish on Mondays was based on the premise that restaurants tend to buy their fish on Tuesdays and Thursdays, making Monday’s fish inventory the least fresh and savory. It takes an insider to highlight an insight. As for me, I prefer fish on most days. However, when it comes to investing, my preference is for an ownership stake in a healthy business over fishy alternatives.