The Garrulous Jay – Quality Street

After three years in which global equity markets have risen 55%, and with the media fuelling fears of an AI-driven bubble in markets, it is tempting to beat the retreat, take money off the table or at least to derisk.

I was therefore grateful to the friend who sent me a link to an excellent piece in the FT last week written by Ruchir Sharma, titled “The best time to buy quality stocks is now”.

In the article Sharma defines quality stocks as those “characterised by high return on equity, stable earnings growth and low debt levels”, but also with strong cash flows and high dividend yields. He argues that these stocks as a group, “have not looked more attractively priced since the early 2000s”.

I am mindful of the fact that Sharma may be ‘talking his own book’. He is Chairman of Rockefeller International, part of wealth and investment management company Rockefeller Capital Management.

I would also argue that however cheap quality stocks look relative to their ‘growth’ and/or ‘value’ peers, when the tide goes out on equity markets it tends to take all boats with it, not just those that have rallied hardest into the turn.

Nevertheless, I think Sharma’s article serves as a timely reminder that bubbles – assuming that is what we are in – present opportunities as well as threats to those seeking to build wealth, particularly if one is willing to take a longer-term view.

His basic point is one about asset allocation: and this is partly to do with choosing the right stocks in which to invest at the right time.

But I think it is actually both broader and a little more nuanced than that.

Not only should this approach apply to equities, but it can also be extended to other asset classes too, be they bonds, real estate or commodities. In fact, it should be about those asset classes themselves: choosing when to invest in which asset classes above and beyond which assets within each class.

It is also more nuanced, because I doubt even Sharma would advocate putting all one’s eggs in the quality basket.

There will be other portfolio managers out there no doubt equally able to point out the generational opportunities in value stocks, and even advocates of growth investing who will argue that their portfolios are filled with companies whose forward earnings justify their superficially lofty valuations.

Taking all of the above together, I would draw two conclusions.

First, over the long-term asset allocation matters more to returns than the careful selection of individual stocks or bonds, or whatever asset class one chooses to look at. This is as much about making the right decisions about time horizon and risk as it is return.

Secondly, doing nothing is usually a better decision than doing something. As I have said before, the ‘easy’ decision to make is the one to sell. Once done, the much harder decision is when to buy again.