Personal Note from the Manager
There are many differing opinions on the subjects of economics and
investment valuation. From Wall Street to Main Street there exists the gamut
of viewpoints
on both subjects, from the state and direction of the economy to an individual's
favorite stock(s). In my experience, and in a professional context, commentary
on economics and investment valuation cannot be separated
from the individuals who deliver them. This simply means that neither are exact
sciences and they are therefore open to interpretation. From a bull to a bear
and from a growth manager to a value manager investment styles differ. It is my view that economics and
investment management are inseparable, or put another way, to understand investment management an understanding
of the critical components of economics is needed.
In terms
of establishing the business of Constitution Investment Management, I had
to define the style of investment management I wanted to practice and
in parallel further my understanding of economics. These objectives were
realized during the period from 1999 to early 2005, which represented
a period of intense
research. It was during
this period that I began privately documenting and analyzing the US and
international
markets. This included the height of the bull market in the late 1990's
and the ensuing downturn accompanied by historically low interest rates.
My understanding of economics was profoundly transformed when
Chairman Alan Greenspan drove the Federal Funds Rate to 1% and effectively turned economics
upside down. This period is clearly unique. From this 'inverted
position' I was able to piece together linkages in the economic system,
ranging from the actions of the Federal Reserve, to the behavior of various
participants
in the market and the significant impact of globalization. It is widely
held that these 'forces' combined with technological advancements
resulted in an historically low interest rate environment, which in turn
sparked, in my
view, the asset price inflation we see in the US and globally. It has been suggested that the current environment
is the culmination of events
and changes stretching back as far as the early 1980's. Changes like these present significant challenges to the
investment environment and make accurate valuations a very complex task and economic forecasting near impossible.
Selecting
the investment style to practice was far easier - I just followed Warren
Buffett and read and noted as many of the books on his value style
as I could
get my hands on. The subject matter is however very difficult to master,
and like economics, will be a constant work in progress to refine and
improve. It is this economic and investment valuation research combined with my
professional experience and education that underpins the business of
Constitution Investment
Management Corporation. The economic research will in time be published on this
web-site for client use, and consists of analysis and commentary on the
current global
economic environment, and any historical factors that played a role in
its development.
In conclusion, during the period extending from the
late 1990's to 2005
it has been difficult, at times, to practice the value investment approach primarily due to the historically low interest rates which sent asset prices soaring.
I now view economic indicators, such as GDP, the unemployment rate and money
supply, with greater caution and suggest that certain economic relationships
that may have existed in the past, most notably the current account deficit
and its relationship to interest rates and exchange rates, are not exhibiting
the
same correlation at present. It seems to me that the only certainty is
that there exists an inverse relationship between interest rates and asset
prices.
And it
is this relationship that has made the current market difficult for anyone
practicing a true value approach to find bargains. Nonetheless cycles
come and go and I
am confident that at some point in the near future, in a more normalized
interest rate environment, asset prices will make much more sense to
me and a great
many others.
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