Back in 1979, HSY had an operating margin of 10.5%, gross margin of 28.2%, roce of 23.5% and roe of 16.4%, with an f-score of 1.0. (I can’t see their metrics, from earlier in the decade, unfortunately). Not a bad company, but not great.
Comparatively, my portfolio, has an average operating margin of 30.8%, gross margin of 61.3%, roce 33.9% (rooce 42.51%) and roe of 45.5%. Average F-score of 6.1. Debt to market cap 4.1%.
I feel fine about it. It is, in aggregate, a better ‘company’ than HSY was in 1979, all other things being equal.
I agree a re-rating is certain at some point in the future, in a downwards direction. Afterwards, though, it is equally certain to rerate back to where it was, at some point. If individual company profits are higher at that point, the portfolio will be worth more than it was at it’s previous peak.
Again, from the Smithson letter, imagine you have a lovely Labrador or a ‘mad as a box of frogs’ Spaniel and you are enjoying a summer stroll through the glorious British countryside:
Imagine a dog walker crossing a field, their dog wildly zigzagging around them. We would relate the companies we own to the walker, clear in direction and making steady progress across the field, while the daily market price is like the dog, moving back and forth quite randomly. Now, the current economic storm may well send the dog cowering for cover, but given enough time, we know that the price and value will eventually meet again, just as the dog and walker will ultimately leave the field together. We are also confident that, as well as making constant progress, a high quality company, if it trips during the storm, will rise again and keep going. Low quality, value companies on the other hand, may never get back up
This quote doesn’t answer the asset allocation question, but it does suggest quality companies will carry on and progress.
Indeed there is the argument that during tough economic times the stronger companies will gain market share at the expense of weaker competitors (who cannot deal with the tougher environment) and come out of a recession better positioned to benefit from the upturn, their competitive advantages enhanced.
As for gold, I won’t invest in it, for the same reasons I wouldn’t invest in bitcoin. Neither do anything for the benefit of people or society. They take up scarce resources, which should really be allocated else-where. (Gold looks quite pretty, I suppose, but it has limited industrial purposes).
(With respect to HSY, maybe it is worth taking 10 years of going no-where in return for a 220x performance of the following 40 years, in nominal terms, which is possible if you believe in the company?)