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Why we get to earn our returns
Over the long-term we care about the cash flows that an asset will produce. As such, when investing in Equities, a company's earnings growth (i.e. growth in cash flows) is generally the most important driver of shareholder return. However, in the short-term, changes in valuation is the most important driver of returns. It can take 5+ years for changes in earnings to overwhelm changes in valuation. That is a long time!
To do what we do, we must be willing to ignore how our results will look in the short-term. That is a tradeoff we make in pursuit of more attractive long-term risk adjusted returns.
That is a trade-off that the market is not willing to make.
Given most market participant's preoccupation with short-term results, share prices fluctuate in a material way. Often movements in share prices are more pronounced than changes in company fundamentals. Even the shares of what should be the most stable businesses in the world experience significant short-term volatility.
We aim to capitalize from when short-term price movements decouple from business fundamentals.
Source: Zorea Capital analysis.
Source: Reuters.
Market structure plays a big role. Most investors simply cannot maintain a long-term perspective. About 80% of American equities are held by institutions. Institutions are generally evaluated on 1-3 year performance. They do not have the luxury of patience.
In addition to the institutional imperative. Most institutional and individual investors are human. Humans are exposed to biases that become magnified in a market that offers instant-by-instant quotations. Some of these biases include anchoring bias, availability bias, the endowment effect, and an inability to measure time rationally, amongst others.
All these factors make investors act irrationally which creates opportunities for Zorea and our investors.