STRATEGY INSIGHT

April 2014

Value Investing Five Years After the

Great Financial Crisis
The S&P 500 index closed on March 9, 2009 at 676.
Five years later, the index stands at over 1,800. On a
total return basis with dividends reinvested, U.S. equities
are up more than 200%. While the rebound elsewhere
has not been as spectacular as in the U.S., European and
Japanese equities are still up 130%-150% on a total
return basis over the past five years. The surge in
developed market equity prices has been accompanied by
a dramatic change in sentiment: whereas in March 2009
most investors were extremely pessimistic and fearful of
a systemic collapse, many investors today see equities as
likely to march higher boosted by perpetually easy
monetary policies and technological innovation.
For value investors, who strive to purchase and own
securities trading at a discount to their underlying
intrinsic values1, todays environment is challenging.
There are simply fewer high quality businesses available
at obviously attractive valuations. Given this environment,
what should value investors do? Below Ive listed five
strategies that our equity investment teams are employing
at Brown Brothers Harriman & Co.
1. Selling when share prices reach our intrinsic value
estimates We prefer owning a good business to
holding cash. However, when share prices reach or
exceed our intrinsic value estimates, we generally
exit our investments. While holding higher levels
of cash in a rising market may not feel good, we
feel cash provides great protection and flexibility
in a down market. We are most interested in
generating attractive absolute returns over the
long term, not chasing near term relative returns.
2. Avoiding the temptation to purchase lower quality
1 Intrinsic value represents what we believe to be the true value of a
security based on our analysis of both tangible and intangible factors.

businesses In past cycles when equity valuations

have become more expensive, we have seen
investors sell higher quality companies trading at
elevated valuation multiples and reinvest in lower
quality companies trading at what are perceived
to be still reasonable multiples. In our experience
trading down in business quality is a mistake.
When the next downturn does occur, the lower
quality businesses are generally the ones that see
their earnings and cash flows decline the most.
3. Insisting on balance sheet strength and high levels
of free cash flow Companies with conservative
balance sheets that generate high levels of after
tax free cash flow are much better positioned to
handle economic shocks and challenges. While
we do own companies that employ debt in their
capital structures, the leverage must always be
appropriate for the earnings variability and capital
intensity of the business in question.
4. Continuing to own businesses that we believe are
well positioned for the next decade When equity
valuations appear high, there is a temptation
to sell equities to raise cash in an effort to try
to time the market. Unfortunately, timing the
market is extremely difficult. Even if one could
sell at a market peak, one needs to decide when to
reinvest. There are some investors who sold their
equities in 2008 and 2009 and who are still in
cash. Our experience is that the best way to create
wealth is by owning high quality businesses over
many years. Accordingly, if a business meets our
demanding qualitative criteria, is well positioned
for the next decade, and is still trading below
its estimated intrinsic value, we will generally
continue owning shares even if the overall market
appears expensive.

Strategy Insight / april 2014

5. Partnering with management teams that are

proven operators and capital allocators A
capable management team that executes well,
thinks strategically, and allocates capital effectively
should add tremendous value to a business over
time. This is particularly true in moments of
economic and market uncertainty because the best
managers often anticipate challenges and can then
seize the inevitable opportunities that arise.

only and should not be considered investment advice.

The opinions expressed are those of the author as of the
date of this article, and are subject to change without
notice.

In conclusion, equity valuations today are generally not

as attractive as they were five years ago or even a year
ago. We think today is a time to be careful and patient
and to employ the five strategies highlighted above. We
also believe that the benefits of value investing should
prove particularly evident in the years ahead.

Timothy E. Hartch
BBH Core Select Co-manager
BBH Global Core Select Co-manager

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