Over two-plus decades as investment managers, we have always believed that at the end of the day successful investing is largely determined by the companies you invest.
Everything else, to a certain extent, is window dressing.
Whether you invest in mutual funds, ETFs, options, stocks, sector funds, etc… the value (i.e., earnings) created by the companies represented within these investment vehicles will drive the performance of these investments.
Sounds simple, but an often-overlooked concept for many investors… especially when it comes to emerging markets, predominantly China.
Look no further than the recent debacle of Luckin Coffee, a sort of trimmed down version of Starbucks operating in China. Less than two years ago this startup was opening coffee shops at a pace that not even Starbucks could keep up with.
In fact, as displayed in this chart, Luckin was projected to surpass the Siren by the end of 2019, as far as store counts go. A great story, right?
Well, it appears that is all it was… more of a great story, rather than actual business success. On April 2nd, Luckin’s stock (which trades on the US stock market), dropped 82% as news broke that the Chief Operating Officer and several employees fabricated as much as $310 million in sales. No one could say they saw this coming, but you definitely could have avoided it… even if you want exposure to China in your stock portfolio. Can we say, multi-national?
We do seek international exposure in our portfolio(s) and ten times out of ten, we prefer to invest in US-based companies to meet this need. In this particular instance, big shocker… Starbucks is our choice as it is clearly a superior company. And the reason being is not because we thought Starbucks would outperform Luckin. No, we invest in Starbucks because we understand the company, trust the company and forecast it to grow and provide us our required return on investment.
A simple idea, but let’s not forget, successful investing begins and ends with the companies. And when it comes to emerging market exposure… start with the US stock market; it hasn’t failed us in two-plus decades.
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Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.