Today will naturally bring commentary about how the future political landscape will affect the investment climate. Last night, the U.S. re-elected the incumbent president, who campaigned on a platform of higher taxes for the wealthy, higher capital gains taxes and other measures that are often perceived as unfriendly to the free market capitalist. So, here is how you adopt your investment decision-making over the next four years.
Don't change a thing.
Every couple of years, I go back and do a self-assessment of all the investments I have made for Gad Partners Fund, my no-asset-management-fee hedge fund. This self-assessment enables me to better understand my decision-making process, and that bodes well for me as an investor and for my clients. After all, shame on me if I repeat the same mistakes. What I find is that value (what I pay to own an asset), a strong balance sheet, and shareholder-aligned management are crucial. When I don't overpay and avoid a highly indebted business run by a shareholder-friendly management team, more than 90% of my investments are profitable.
In October 2011, I mentioned the merits of small-cap insurance company Homeowners Choice (HCI) and why it was a bargain. Shares were around $7, 80% of book value, and it was one of the most profitable insurance companies in Florida as measured by the combined ratio. Today, shares are floating around $21, a tidy 200% return. I was lucky and I managed to get out around $23 after buying for less than $7.
At the beginning of this year, I panned Bank of America (BAC) as my high-conviction investment seeing how shares dropped by more than half in 2011, were trading at less than 40% of tangible book and despite CEO Brian Moynihan's mandate of deleveraging the balance sheet. BofA is up more than 70% this year.
America is an unbelievably resilient country that grows, stumbles, picks itself up, and grows even more. Investments should be made based on qualitative and quantitative factors, not the political landscape. Regardless of what you hear, whether it's from Democrats or Republicans, America is still primarily about capitalism. And capitalism promotes competition, which leads to innovation and growth. That's the foundation of my investment choices.
Should Mr. Market turn sour in the next couple of weeks or months, I will use that as an opportunity to invest should prices become attractive. If Dell (DELL) continues to trend lower, that makes me smile because in the short run, markets vote. But over time, fundamentals and growth take over. And over the past four years, Dell has generated more than $15 billion in free cash flow. Dell's current enterprise value is less than $13 billion.
Emotional behavior and reactions have never been, and never will be, conducive to a successful investment approach. Don't let the emotion of political rhetoric cloud the fundamentals of American capitalism.
