With the 2016 summer Olympic Games only a week away, I am reminded of the excitement that often surrounds the 100-metre dash. The anticipation as the sprinters line up, the speed with which they accelerate and the split-second finish all combine to make it one of the most highly anticipated events of the games. The marathon, on the other hand, is a long, drawn out race that garners few viewers from start to finish – it is boring. While the marathon may be lacking in excitement, its runners are well prepared for anything that comes at them. Over the course of 42 kilometres, they must pace themselves while dealing with exhaustion and adversity, and be prepared to pick up the pace if they are falling behind. The sprint, in contrast, is over in a matter of seconds. It can be won or lost based simply on how quickly the sprinter responds to the starting gun. Two false starts result in a disqualification – a fairly common occurrence that can cause the race to be over before it starts. While a slow start in a marathon can be disheartening, it is a long race. Marathon runners rarely – if ever – false start, and a slow start still leaves 42 kilometres for the marathon runner to catch up.
As a value investor, it is important to invest in marathon runners and avoid the sprinters. While high-risk growth stocks (the sprinters) may have the potential for tremendous upside in a short time period, they can also quickly drop to zero. Think of a small, biotech firm that has not yet received regulatory approval for its new drug. While the drug is being developed, the firm incurs continual losses in the hope that it will discover something groundbreaking. If it does and the drug receives approval, the stock will skyrocket. On the flip side, if the drug does not come to fruition, investors will be left with nothing. While this type of an investment may be more “exciting,” we at Burgundy believe the more stable, long-term investments (marathon runners) are the smarter way to go. So what are the characteristics to look for in a marathon runner?
A well-established company with a proven history of delivering returns to shareholders, a strong competitive advantage over its peers and a healthy balance sheet are a few characteristics we look for in companies. While these companies on average are not expected to double in value over the next month, they will likely be around to generate returns to investors for the next number of years. A “marathon runner” company is not reliant on one catalyst to generate returns. It is an adaptable, stable, durable business that can withstand tough times and make it to the finish line. Expanding your time horizon and investing in marathon runners will increase the probability that your portfolio is conditioned to sustain the ups and downs of the market and make it to your finish line.