Over 30 years ago, Groundhog Day premiered—a film in which a reporter (played by Bill Murray) covers the “Groundhog Day” event with some disdain. During the event, the groundhog Phil predicts whether winter will continue or end early. The reporter finds himself stuck in a time loop, reliving the same day over and over again.

One might say financial markets experience the same phenomenon. At the beginning of each year, major banks release their economic outlooks for the new period, and we speculate on which assets will perform best, trying to determine the optimal positioning for the year ahead. In recent years, we seem to be living through a double Groundhog Day due to the unidirectional nature of markets—S&P 500 +23.3% and Nasdaq +24.88% in 2024, dominated by the “Magnificent 7.” A staggering fact underscores this: the top 10 companies in the S&P 500 represent over 36% of the index.

Unfortunately, in financial markets, Phil the groundhog cannot tell us if winter will end sooner or where the cold will be harsher. Instead, we face an additional challenge: FOMO (fear of missing out). Should we bet on what has worked in recent years despite high valuations, or look at overlooked areas of the market trading at attractive multiples, at the risk of missing out on another strong rally from the usual suspects?

Cobas AM’s flagship fund, Selección, achieved a return of over 23%, comparable to the aforementioned indices. This is remarkable given our investment style—value investing—which has significantly lagged these indices (MSCI Value Europe at 12.18%, MSCI World Value Index at 11.47%).

This is not to imply that we will match the best-performing asset class every year. Instead, it highlights the reasons behind this decoupling, providing a framework for making informed investment decisions.

In the short term, markets are dominated by uncertainty. Each year begins with countless predictions influenced by exogenous risks that are nearly impossible to foresee: inflation rates, monetary policy, geopolitical tensions, energy prices, and more.

However, by focusing on timeless principles, we can ensure solid long-term returns regardless of short-term fluctuations. At Cobas AM, our investment process is centered on identifying those immutable factors. Here are some key principles:

  1. Companies with Profits and Competitive Advantages
    The value of a company is defined by its ability to generate profits. Companies that grow their earnings over time turn time into an ally. If the market undervalues them, the gap between price and intrinsic value will continue to widen, eventually triggering a correction by the market.
  2. Attractive Multiples
    Paying the least possible for quality companies is critical. The cheaper the valuation relative to earnings potential, the higher the probability of superior returns. It’s essential to distinguish between a great company and a great investment.
  3. Low Leverage and a Margin of Safety
    Excessive debt jeopardizes operational stability and even survival during market downturns. Too much debt is the greatest enemy of long-term investments. Our fund has a potential upside of over 140%, offering a substantial margin of safety to minimize risks.
    2024 has clearly shown that the long-term value of a company hinges on its quality and ability to generate earnings. The maturity of our theses and the strong performance of our investments have driven market recognition, even though our style of investing has not been broadly favored. Some years, we may underperform. Other years, like 2024 or 2022 (when Selección returned nearly +10% during a year of negative returns across most asset classes), the market rewards our approach. While the capriciousness of the short term cannot be avoided, investing in quality businesses at attractive valuations remains a proven formula for achieving strong returns over the long term.

Thus, we can escape the time loop we face at the beginning of every year and free ourselves from relying on Phil the groundhog to determine the winning asset classes. It’s within our control.

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