“Wildfires and earthquakes shouldn’t really come as a surprise to those of us who live in California, yet, when they occur, it is still a shock. The advice we get is to “expect the unexpected” – to prepare by setting aside drinking water and shelf-stable food that might be needed in an emergency. There are parallels to the idea of planning for the aftermath of a natural disaster and being prepared in advance of an unexpected market downturn. For one, financial strength is a factor that is emphasized in our analysis of investments – I suppose that’s akin to having your home bolted to the foundation, a practice that reduces earthquake damage. At Poplar Forest, we also prefer companies that have sustainable free cash flow, which may be equivalent to those supplies of water and canned food. Finally, we use scenario analysis to examine how our investments will perform, not just in good times, but also in the equivalent of investment wildfire.” - J. Dale Harvey
“When looking at stocks, I think from the perspective of someone who owns the whole business with plans to own it indefinitely. The enterprise is sure to have both good and bad years, but what I concern myself with is the average year – what I consider “normal” – or, said another way, what the business should be able to do as opposed to what it currently is doing. Where others may get scared away by sub-normal results, the opportunity to close the gap between current and normal whets my appetite.” - J. Dale Harvey
Bottom-up Investing After Macroeconomic Anomalies
With valuation as our north star, we apply the same, bottom-up investment process across all sectors of the economy, regardless of their macroeconomic sensitivity.