July 20, 2010
Germany is an example of that, right?
Yes, and if you are going to be selling to the Mediterranean countries, you are going to have trouble if those are your markets. If your markets are abroad, you may do very well. But you have to be careful. Don't totally write off Europe. Europe has problems, but some firms are going to do well.
Let's talk about the other extreme, where there is a fair amount of optimism. That is emerging markets, China, India of course, but there is also Brazil, Turkey, Indonesia. What is your take on valuations there and the kind of returns that investors can expect in those markets compared to developed economies?
Over the last three or four years I have been very enthusiastic about the emerging markets. I look at their valuations today, and virtually everyone is under 20. For countries that are growing as fast as they are – they are not going to grow as fast as China, we know, or even 6% or 7%, which India has managed over the last four or five years – to have 15, 16, 17 valuations. Indonesia and these other countries they are buys. As a group I think they are going to be winners going forward.
We've talked about a couple of regions. I want to talk about the financial sector. We've had a conversation about financials. Today in the Wall Street Journal there is an article that suggests that based on price-to-book ratios, financials have entered into the value realm as stocks. What is your view on financials as a category today?
I'm enthusiastic about financials. I think they have been priced to write-off a much larger percent of their assets than are going to be written off. In other words, mortgages that are priced 20 cents on the dollar are going to get 50 cents. Commercial loans that are now going at 35 cents might get 70 cents or maybe will remain good.
Just as there was way too much optimism before on what those loans are worth, there's too much pessimism right now. And right now it's the only game in town. The banks have $1 trillion of excess reserves in the United States on which they are getting 25 basis points. If they see any bargains, if they get any degree of confidence in terms of the borrower, their spreads are going to be extremely high and that is going to make for good profits. So I see them at the value end again. On a book ratio and even on an earnings ratio, they are going to be a standout performer in the next 6 to 12 months.
I want to talk about your view of the impact of the Internet. It has transformed the way many of us to business and operate our daily lives. What is your take on the impact of the Internet on stock profitability and stock prices going forward?
One of the biggest outcomes of the Internet is going to be the acceleration of research, discovery, invention, innovation, or whatever you want to call it. I see my colleagues working on problems with fellow workers in China and India, everywhere around the world, which would not have been possible 10, 15, or 20 years ago. When brains get together, they can do innovation. There's going to be an acceleration of innovation and productivity growth.
At the same time, we also know when information is freely available there is a lot of price competition. That was apparent at the very beginning of the Internet boom, when you could find out who has the cheapest prices. But firms have been able to navigate around some of those issues. The biggest force going forward is we are going to see new products, inventions, and innovations. Those people on the edge are going to be able to get the revenues. I think it's net positive for economic growth and positive for corporations.
We talked at the beginning about what's happened over the last 10 years. It's been a disappointing period for investors largely because their entry price was just too high. What kind of lessons would you say investors should draw from what has happened over the last 10 or 20 years in terms of the stock market?
Valuation counts a lot. You can't say you’ll eventually be bailed out no matter what price you go in at. You have got to pay attention to the price. It may be true if you wait long enough you will be bailed out, but that's not what investing is about. Just take a look at historical valuations and where we stand now. If you are buying at or below long-term valuations, there's no reason why won’t get the long-term returns which have been so outstanding in stocks. Don't forget valuations. I think that's the main message.
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