Burns: We’ve had a number of years of unprecedented challenges and volatility. It’s been crisis on top of crisis. On top of that, you’ve had an unusually high inflation environment like we haven’t had for a very long time. That probably would have happened anyway, as part of the reopening after the pandemic and supply shortages, but it’s obviously been exacerbated by Russia’s invasion of Ukraine.
Coutts: We’re in what historian Adam Tooze calls a “polycrisis.” Predicting the course of any crisis individually is difficult, let alone how the crises might all interact.
Burns: Dealing with inflation, it’s good for some companies that have pricing power. Those that don’t are facing difficulties. The other aspect, particularly for equities, is the time value of money, with discount rates a wild variable. You’ve got all of these things going on at once, making it very difficult to know what will happen. As Benjamin Graham used to say, in the short term the market is effectively a voting machine; you’re always guessing how other people react to that information.
We have to think about the environments companies have to operate in the short to medium term, but we continue to focus on where they might be in 5 to 10 years’ time.
In the long run, radical innovation will always matter, irrespective of the inflation environment. I think about MercadoLibre, which operates in Latin America with very difficult political and macroeconomic environments, including inflation rates that make ours look tepid by comparison. Because the secular shift toward e-commerce and online financial services has been so strong, it’s still one of our best contributors by far and it’s gone up many multiples in value despite that difficult environment.
As a fund manager, as an investor, you have to know what your circle of competence is, where you have a possibility of having an inside edge.
We’re focusing on the fundamentals of companies that are driving innovation and change, and with the help of others, we have some experience, some insights around that. Whether these companies are able to drive radical innovation, that’s the key thing that matters and should be valuable irrespective of the broader context.