The investment reality today is very different from the past decade, with trends like low interest rates and globalization reversing. However, this doesn’t mean investors need to drastically change their approach. By focusing on fundamentals like high quality assets and sustainable competitive advantages, investors can still generate solid long-term returns. The key is sticking to timeless, proven investing principles centered around the higher word investment.
Globalization and cheap production costs fading
One major trend reversal is globalization and cheap production costs. In the past decade, investors benefited from cheap labor and commodities as production shifted to emerging markets. However, with rising geopolitical tensions and nationalism, global supply chains are localization. This will likely raise costs and trim profit margins. But quality companies with wide economic moats can overcome this through brand value and pricing power. As long as investment is made in companies with durable advantages, higher costs can be passed to consumers.
The end of easy monetary policy
Another reversal is easy monetary policy, with interest rates rising rapidly. While this will dampen speculative excess, it also means higher hurdle rates for investment. However, astute investors know that return on investment is largely constant over time. Focusing on companies with high returns on capital and minimal reinvestment needs will maintain solid growth. Adhering to selective investment in quality and value will overcome tightening conditions.
Inflation reduces real returns
With inflation back, real returns will be lower. But inflation resilient businesses with pricing power can maintain profitability. The key is investing in companies with wide moats, strong brands, and high customer loyalty. Then inflation’s impact on real investment returns will be minimized. Sticking to a selective approach and not overpaying remains effective in inflationary times.
Passive investing gives way to stock picking
The long bull market increased the popularity of passive investing. With high correlation and valuations, stock picking is coming back in vogue. This plays to the strengths of prudent investors focused on assessing intrinsic business value. With divergence in stock performance, investment skill and research will be rewarded again. Remaining valuation discipline and focusing on quality will uncover winners.
While the investment backdrop has markedly shifted, the sound principles of long term, fundamental investing still apply. Astute investors build resilience into their portfolios by targeting quality companies with durable competitive strengths. Adhering to selective investment with a margin of safety will continue generating sustainable growth.