YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

A Message of Hope


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In our client letters, we often mention our concerns so that you are aware that we are not blinded by the “animal spirits” in this upward trending market. We voice these concerns so that you know we are indeed watching, observing, and being vigilant as we construct and manage your portfolio. However, you likely have noticed we are always quick to mention that we are long-term optimists about our portfolio holdings. This contrast may seem counterintuitive, and so, rather than discussing our concerns as in times past, we felt strongly we should spend some time explaining some reasons as to why we are optimistic about the future.

The long trends of history are decidedly positive, as we can very clearly see from studying…well, pretty much anything. Trends in violence, death tolls from natural disasters, health, poverty, energy, civil rights, labor productivity, GDP per capita, and stock market returns show amazing progress on all fronts of the world’s efforts to improve the human condition.

Given the media’s focus on the still-far-too-much violence in the world today, you may be surprised to learn (we certainly were) that rates of violence are actually almost universally in long-term decline, most likely due to both the increasing interdependence of the world created by positive-sum trade and commerce and the improvements of governments over time at making violence and theft negative-sum activities for the perpetrators of these crimes. Overall, only 1% to 2% of people now die from violent deaths vs. roughly 15% of people in pre-state societies. Homicide rate declines are even more impressive, particularly in the Western world. As an example, rates of death from homicide in Western Europe are down from between 40 and 90 deaths per 100,000 per year in the year 1250 to just 1 in 100,000 now, and the world’s overall homicide rate stands at only about 7 per 100,000 people, with 8 of 10 regions of the world studied by the United Nations Office on Drugs and Crime continuing to experience declines even during the recent period from 1995 to 2010. Deaths in war have plunged from 17 per 100,000 per year in the 10 years after WWII to less than 1 per 100,000 in the last 10 years, making ours arguably the most peaceful era of history. We want to be clear that we recognize that there are still many casualties in war. We are deeply grateful for the men and women (and their families) that serve our country, and we view these statistics as a hopeful sign that perhaps fewer will have to make such tremendous sacrifices in the future.

Death tolls from natural disasters show a similar trend. While we can’t control the weather, we can certainly take steps to minimize its human cost. Between 1980 and 2002, the average earthquake killed 2,300 people in India and only 8 in the United States. As poor countries get richer, they should rapidly trend toward developed country levels.

In the arena of health, the situation is similarly optimistic. The average worldwide life expectancy has risen from 53 in 1960 to 70 in 2010. Encouragingly, these increases are fueled by improvements in countries on the high and low end of this bell curve. The average life expectancy of both Sub-Saharan Africa and the U.S. have increased over this time period, with Africa up from 40 to 54 and the U.S. improving from 70 to 78. Some of the most important achievements in improving life expectancy are occurring in the area of child mortality. Despite the world population having increased over the last twenty years, remarkably, the number of under-five deaths worldwide has decreased, falling from 12 million in 1990 to 7.6 million in 2010. Even more encouraging, the rate of reduction in the worst regions of the world for under-five mortality has actually been speeding up. Sub-Saharan Africa, which has the dubious distinction of topping the list, has doubled its average rate of reduction, from 1.2% a year over 1990-2000 to 2.4% during 2000-2010. Breathtaking medical and technological innovations and vast improvements in measurement practices are major causes of these health improvements, in no small part because they have led to dramatic declines in deaths from some of the world’s most pernicious diseases. Deaths from malaria are 20% lower than only five years ago, death rates for both lung and breast cancer have fallen by more than a third over the last 40 years, and even Aids deaths have been on the decline in recent years. Polio, which hundreds of thousands of people contracted each year as recently as the 1980s, is on the verge of eradication, and, if the worldwide effort is successful, will be only the third disease to be completely eradicated (smallpox and rinderpest were the first two). Such an astounding accomplishment will very likely galvanize already tremendous efforts on other diseases, speeding up future progress.

Poverty is also on the decline. While poverty in the U.S. (which is defined as a lack of those goods and services commonly taken for granted by members of mainstream society and is equivalent to a yearly income of $23,050 for a household of four) has increased over the last couple of years from a low of 10-11% in the late 90s to 16% in 2012, poverty rates are still lower than they were during the boom times of the late 1950s (when they were 21-22%). More importantly, even in today’s tough economic times, extreme poverty, in which households are living on less than $2 a day before government benefits, is fairly minimal at only about 1% in 2011. The real story is the worldwide one, however, and it’s overwhelmingly positive. Worldwide, the proportion of people living on $1.25 a day fell from 47% in 1990 to 24% in 2008. Additionally, the proportion of people with sustainable access to safe drinking water has gone from 76% in 1990 to 89% in 2010. It’s no exaggeration to state that there has never been a time in which a higher percentage of the world population has had access to the basic subsistence needs that we in the U.S. take for granted.

Commodity and energy costs are, inflation-adjusted, lower than they were 100 years ago, and the recent shale gas boom could very well provide energy abundance for the foreseeable future. This scenario is not even factoring in the holy grail of cheap batteries that could store intermittent energy sources like solar and wind or some other technology that accelerates the not-often-reported move that developed countries have already begun to make away from fossil fuels. While the rich world’s economies grew by 6 per cent over the last seven years, fossil fuel consumption in those countries fell by 4%, suggesting that many countries are already preparing for inevitable (though likely very far in the future) decline in non-renewable energy sources.

Since the late 19th century, equal rights and opportunities for women, children, and minorities have been dramatically on the rise, with one incredibly important statistic being that the world has achieved parity in primary education between boys and girls, going from a ratio of 91 girls to 100 boys in 1999 to parity in 2010. Additionally, we’re all well aware of, but frequently forget to marvel at, the worldwide declines in slavery, increases in voting rights, and improvements in child protections such as labor laws.

Labor productivity has increased in the vast majority of the world over the last 10 years, but the developing countries still have a long way to go, with one-tenth to one-third of the productivity of the Western world, which should lead to growth and improved living for years to come. Even in the developed world, productivity is 33% higher than it was 20 years ago.

And these trends are even more impressive when you focus in on the long term impact this productivity has on GDP per capita, even in the face of many scary events like world wars, oil embargos, depressions, iron curtains, etc. On an inflation-adjusted basis, U.S. GDP per capita is up 2.5x over the last 50 years and more than 7.5x since 1900. Importantly, even if GDP per capita growth rates slow, a little recognized fact is that, since we’re starting from a bigger base, the actual improvements will be much larger per year than most of the years during which this economic miracle occurred.

As long as humanity continues the dual trends of 1) capitalism and 2) governments that effectively protect individual rights/property and fairly mete out justice, mankind is likely to flourish and the companies in which we are invested will likely ride these positive trends towards more profits and higher stock market prices, just like great businesses did over the period from 1900 to March 31st, 2013, during which the Dow Jones Industrials advanced from $66 to $14,579, a staggering 22,089% return not including dividends. If the future is anything like the past (and the above rationale suggests it very well might be better), then you don’t want to miss out!

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Elliott Savage | April 30, 2013 | Permalink

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