Better Value


Global equity markets continued to decline in the first quarter 2009. However, on March 9, a strong recovery started, which is still continuing at the time of writing. The Morgan Stanley Capital International (MSCI) World Total Return Index (with net dividends reinvested, December 1984=100) declined 10 % in local currencies, 11.9 % in US dollars and 7.8 % in euros to finish the quarter at LC 468.1, $ 649.7 and € 304. Over the last fifteen months, the corresponding benchmark losses were 44.8 %, 47.8 % and 42.5 %.

All but one market (Belgium) declined in the first quarter. Belgium was able to eke out a tiny 0.1 % gain during the first three months, while Norway and Hong Kong gave up 0.4 % and 0.5 %, respectively. This year’s worst performing markets were Italy (-16.8 %), Germany (-15.8 %) and Spain (-14.7 %). Over the last fifteen
months, all markets covered here suffered double-digit losses, with Canada (-33.1 %), the United Kingdom (-35.9 %) and Australia (-38.6 %) faring best, while Austria (-68 %), Belgium (-64.7 %) and Italy (-56.2 %) came in at the bottom of the range.

The Top Value Model Portfolio based on the Top Value Strategy (December 1984=100), using national MSCI country indices as hypothetical investment vehicles, finished the first quarter 2009 at LC 2,191.6 (-7 %) $ 3,175.7
(-9.4 %) and € 1,486.2 (-5.2 %). Over the last fifteen months, the Top Value Model Portfolio declined 49 % in local currencies, 55.2 % in US dollars and 50.7 % in euros.

There was one change in our performance ratings last quarter: Norway was downgraded to “Neutral”  from “Buy”. The Top Value Model Portfolio currently contains the following eight “buy” rated countries at equal weights: Austria, Belgium, France, Germany, Hong Kong, Italy, Singapore and the United Kingdom. Our current ratings suggest that these markets offer the highest expectation of long-term risk-adjusted returns.

Never in the last 20 years have our implicit 3 to 5 year return projections been as high as they are now. For details please see Appendix pp. 66, 67. I would like to put in a word of caution on these estimates, however. They are based on the assumption that the underlying 15-year history of estimated intrinsic values may serve as a guide for the process of security pricing. Readers who disagree with this assumption would have to make corresponding adjustments. The chart below, which shows the history of our implicit estimates for the equally-weighted World
Index suggests, however, that while the euphoria in the second half of the 1990s made our estimates look too conservative in retrospect, the current pessimistic world economic outlook makes them appear rather aggressive now. Stock prices were much higher in 2000 than where we thought they should have been and are much lower now compared to where we thought four years ago they might be today, and where we currently think they should be. Benjamin Graham’s margin of safety indicates that much better times may lie ahead for global equity investors.


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