Since the GFC, almost every investor seems to have become an economist. Many investors these days spend considerable time trying to stay on top of global economics and monetary policy, and believe it necessary to arm themselves with forecasts on commodities, currencies, interest rates and the like. In our view, trying to predict the unpredictable is not a recipe for long-term investment success. As seasoned investors will attest, it is far more valuable to focus on what is understandable and reasonably predictable and that actually drives investment returns.
At the Berkshire Hathaway annual general meeting in early May, Warren Buffett said of he and his partner Charlie Munger that “[w]e are not two fellows who think we can predict the price of soy beans or corn or oil”. Buffett, however, has not shied away from making sometimes-big investments in oil or oil-related companies over the years. It’s just that oil price forecasts have not driven his decision to invest and that, in his words, “[w]e’re thinking about other things when we make those decisions”. So what are these other things?
Most fundamentally, they are the things that drive long-term earnings, which in turn drives long-term shareholder value and returns. Most importantly, they are the company’s competitive position and profitability, industry dynamics and outlook, and the quality of management. Fortunately, it is possible for the enterprising investor to form a useful view on these things, and quite often, this will be sufficient to be able to make quite reasonable predictions on the outlook. Of course, this may not be possible where the investment case must rely entirely on picking exogenous factors such as the oil price. However, there are a number of companies where this is not the case.
One example is Ramsay Health Care (RHC), which is the largest private hospital operator in Australia. The company is very well managed, is extremely efficient in its operations, and owns some of the largest and most popular hospitals in Australia. It requires considerable capital to set up a new hospital, and it is generally uneconomic to do so, especially when it means competing against an existing hospital with the scale of many of those owned by Ramsay. This creates ‘barriers to entry’ that puts Ramsay in a very strong competitive position.
Demand for hospital services is economically resilient, and better yet, demand is growing strongly, especially as a result of medical advancement and the higher service levels of an ageing population. These two factors, innovation and demographics, represent quite predictable trends that allow one to gain confidence that this growing demand will continue for the foreseeable future. Ramsay has plenty of room to expand its existing hospitals, and by incrementally adding new bedrooms and operating theatres it can take advantage of the growth in demand and at the same time earn itself very high returns on capital invested. Doing so has enabled it to grow earnings per share at almost 20% per annum over the last seven years. In light of the quite predictable tailwinds, it is likely that the company will enjoy quite decent growth for some time yet.
The example of Ramsay shows that it is not necessary to fuss too much over the big-picture macro issues of the day, which can often be a time-consuming distraction to the greater task of achieving attractive long-term returns.
Ramsay Health Care (RHC)
Source: Yahoo!7 Finance
Julian Beaumont is Investment Director at BAEP
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
