Applying History's Lessons To Key Questions In Equity Investing

{ Euclidean Q2 2009 Letter }

Thoughts For Q2 2009

If you pay much attention to the media, you might notice there is a great battle going on between those who think the market is going up and those who think it is going down.  There seems to be no shortage of market prognosticators ready to promote their very own detailed arguments about where the market will end the year.

At Euclidean, we have nothing to add to this debate.  We spend no time forecasting the future of markets and are neither optimistic nor pessimistic about the S&P as it stands just under 900. We avoid these debates because our focus is on buying the best companies selling for the largest discounts.

With that as our focus, attention paid to the general market level is wasted energy.  After all, when we find a business that has a number of desirable qualities (such as a long operating history, a conservative balance sheet, and high returns on capital) offered to us for a very low price, we are happy to buy that company regardless of whether the S&P is at 600 or 1,600. 

We have conviction in this “opportunity-focused” approach for two reasons.  First, we have strong evidence that the opportunity to buy good companies at what proved to be irrationally low prices has existed in most market environments.  Second, we believe this has been the approach taken by the world’s most successful long-term investors. 

Representing the interplay between these two inspirations (historical validation and proven success), we offer these words from Warren Buffett’s mentor, Benjamin Graham.  In Security Analysis, Graham wrote: 

"The soundness of a security purchase is determined by future developments and not by past history or statistics.  But the future cannot be analyzed; we can seek only to anticipate it intelligently and to prepare for it prudently.  Here the past comes in - through the back door, as it were - because long experience tells us that investment anticipations, like other business anticipations, cannot be sound or dependable unless they are closely related to past performance."

These words provide good context for how to think about Euclidean.  Our focus has been to seek history’s lessons relating to two key questions in equity investing: 

  1. What are the characteristics of good businesses?; and,
  2. At what price do good businesses become good investments? 

We believe we have uncovered compelling answers to these questions and we are pleased that by putting our findings into practice, we have been able to generate strong absolute and relative results since our fund’s inception.

As a final word to preface the results shared on the next page, our strategy is not architected to perform on a short-term basis.  We do not believe we (or anyone) can accurately predict how the market or the prices of individual stocks will fluctuate in the months and quarters ahead.  Given this, we expect periods of underperformance.  We are confident in our ability to deliver favorable returns only when measured over multiple years.


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Best Regards,

John & Mike