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Play Offense Not Defense

Keppel Corp Vs. S&P 500 Vs. Proctor & Gamble

I get a lot of questions from people asking why I don’t invest in companies like Proctor & Gamble or Colgate Palmolive. Companies like that are defensive in nature, according to investment theory, and should provide shareholder returns no matter what happens to the economy or the financial markets – everyone needs toothpaste and laundry detergent the theory goes, so they are better investments if you want to own stocks.

In the chart above, I’ve put a performance comparison of Keppel Corp, the S&P 500 Index, and Proctor & Gamble. Keppel has far outperformed the other two, and the S&P 500 Index has clearly outperformed Proctor & Gamble. Keppel is the sort of company I really like to have money in. It is located in Singapore with access to the fastest growing economies and the globe’s best demographics. It focuses on some of my favorite investment ideas: water desalination, environmental engineering, shipping, off shore oil rig construction, efficient power generation, and more. It has strong earnings growth because if focuses on businesses that are positioned for the future. It is definitely not a defensive company.

As a foreign mid-cap, there are other risks that have to be managed – we manage them through small position sizes (not risking too much capital on any one company), geographic, thematic and industry diversification, and application of technical analysis to help us raise cash when appropriate. We won’t be right 100% of the time, but over time, our process has shown to provide value for our clients while managing risk. And its a lot better than allowing a client’s money to languish in a defensive stock that hasn’t made them any money in over a decade.

My investment process, as most of you know, focuses on earnings growth and P/E expansion as the driver of share price appreciation. Earnings growth requires being in the right businesses, with the right customers, and operating as efficiently as possible. P/E expansion requires being in the areas of the market that investors place increasing value on because they have a catalyst for the future. Water desalination for an increasingly thirsty world is a catalyst for the future – an improved version of a familiar consumer product at a time of 9% unemployment, not so much.

I prefer to find the companies that allow us to play offense and provide above average returns for our clients. Defense can outperform for short periods of time, but even in the recent market crash, defense lost money. I’ll stick with playing offense – and raise cash if I see a market disruption coming – in order to serve the needs of my clients, even if it means extra work finding companies in Singapore, Bangkok, or Santiago.


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Mark