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

The Wealth Effect

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This morning, in a WSJ article titled “Consumer Mojo Lifts Profits,” we read:

“The broadest measure of U.S. consumer spending, the Commerce Department’s personal consumption expenditures, rose at a 1.6% inflation-adjusted annual rate in the fourth quarter. Based on all the latest data on retail sales and the like, forecasters at Macroeconomic Advisers, St. Louis, estimated personal consumption expenditures increased at a 3.6% rate in the first calendar quarter.”

We must admit we have been shocked by the resilience in consumer spending. What we believe we are observing is what is referred to as the “wealth effect.” This is where the rise in asset values, such as stock portfolios, induces a false perception of increased wealth. This confidence boost causes consumers to be more willing to spend. When the bottom drops out, this temporary self-reinforcing cycle reverses its course.

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: Brian Yacktman | April 26, 2010 | Permalink

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