One of the most challenging things for many of us to grasp is that prices do NOT indicate value.

Why do we use prices as the standard of value? Because prices are easy to understand. It’s the reason a 5-star fund is “better” than a 4-star fund, why a 5-star Uber driver is “better” than a 4-star Uber driver, why the two thumbs up movie is “better” than the one thumbs up movie, etc.

Why do we fall for this? Because it’s been drilled into our heads from an early age. The A student is “better” than the B student. It’s reinforced throughout our adult lives by Big Media that breaks up useful information into easy to consume nuggets and social media that encourages user reviews.

The problem is this short-term focus obscures the truth that long-term fundamentals are what drive value and are ultimately reflected in prices. Short-term prices can be manipulated. Have you seen the price of oil lately? Why does that big screen TV go on sale in December?

Value is driven by process. Businesses deliver value by following a sustainable and repeatable one. We eat at McDonald’s because the fries in Miami taste like the fries in Dallas. We order from Amazon because two day Prime delivery means delivery in two days. We stay at Marriott because the room is clean each and every time.

Let’s argue by anecdote. In the short-term it’s easy to lose weight. There’s the cabbage soup diet, the no carb diet, etc. It’s only in changing dietary and exercise habits that long-term weight management may be achieved.

Investing success requires choosing managers who have a similar mindset.

I’m reminded of the late 1990s. Investment managers who for decades successfully followed sustainable and repeatable value-oriented strategies were getting killed. Firms like Capital Group (manager of the American family of funds) and Bernstein were beaten up because they couldn’t beat the S&P 500. Did these people wake up stupid?…or did their process not allow them to invest in DopeyCompanyWithNoEarnings.com?

Turnabout is fair play. In the early 2000s the “ignore process and buy things just because they’re going up” mentality crashed and burned. Growth managers reaped what they sewed. Maybe they woke up stupid? Ha! Conversely, value managers preserved capital.

The last few years have been somewhat similar. Firms that focus on “smart upside with downside protection” have suffered relative to firms with FANGs (which is to say those that invested in Facebook, Amazon, Netflix and Google).

The point? Having a smart, sustainable and repeatable process requires discipline. It requires being OK with “looking stupid” over possibly prolonged periods of time. The result, however, is long-term, exceptional risk-adjusted ROR. That’s true value. That’s what’s delivered by fundamentals. That’s what’s obtained by ignoring price.

To this end we give you excerpts from recent shareholder letters from a few of Apollo’s favorites – Baron, Dodge & Cox and Third Avenue. Baron invests in “people not buildings,” Third Avenue buys “safe and cheap” and Dodge & Cox is utterly boring. No wonder we like ‘em all!

All letters are short (1-2 pages) and we believe well worth a few minutes of your time.

What are the takeaways?

  1. have a plan
  2. implement that plan through a disciplined process
  3. ignore prices
  4. don’t benchmark to unthinking indexes or “peers”