Shehryar Khan: While investing is about looking forward, as with anything else history helps us to understand what may happen in the future. We always view the idea that "things are different this time" with a great deal of skepticism. I was recently reading the annual letters written to investors by Bob Krembill and Arthur Labatt, two of the founders of Trimark which was later bought by Invesco. In their 1998 year-end letter, they warn investors that a few wildly popular stocks are driving the performance of market-cap-weighted indices, and how investors of the day should be careful when justifying those valuations with factors such as low interest rates and low inflation. They warned that the gap in valuations between the names that everyone owned at expensive multiples and other businesses was not sustainable, and the market would bring things back into balance. They were right, as multiple market corrections over the next decade helped bring valuations of companies back to their historical norms.
If any of that sounds familiar, it's because there are many parallels to be made to today, with stocks like Amazon and the other tech firms that make up the FAANGs responsible for a large portion of the gains in the stock market over the past decade.
Here at Morningstar Investment Management, when choosing active managers for our portfolios, we tend to avoid selecting investment managers that find reasons to justify paying high valuations for today's market darlings. Instead, we emphasize managers that are buying businesses with strong fundamentals, that can grow their earnings at attractive rates over the long term and are trading at reasonable valuations. Over the long term as these businesses grow their earnings, our investments should grow with them. Valuation-driven investing has been proven to work over the long-term, and as history tells us, some things never go out of style.
For Morningstar Investment Management, I'm Shehryar Khan.
