INVESTOR COMPASS

November, 2022

Concentrated value investing

 Eldred Rock Investor Compass November 2022

THE MOST IMPORTANT THINGS ABOUT MACRO

“Despite some severe interruptions, our country’s economic progress has been breathtaking. Our
unwavering conclusion: Never bet against America.”
Warren E. Buffett

M
any of our clients are curious about what we do every day in the office, and often our visitors are
quite surprised. Generally, people can sense whether it is a good or bad day in the stock markets by
observing the energy of an investment firm; however, most of our visitors cannot even tell if the markets are
open. Office TVs are not turned on, and we don’t scream “buy” or “sell” to each other. Over the last
several months, headline news, such as the Russian-Ukraine war and the Fed’s interest rate hikes, have
been overwhelming many investors, and our designed “sleepiness” not only helps us think clearly amid
noisy news flow, but also allow us to look beyond the short-term and remain focused on the factors that
drive the long-term macroeconomic returns. We believe that as long as free markets are still intact, wealth
will be created over the long-term despite macro headwinds.

Human history can be traced back to more than sixteen thousand years ago. Ian Morris, a historian from
Stanford University, proposed a social development Index1 to quantitatively measure the development of
human civilization. His research shows that, despite the long history, most progress of our society was made
in the last 300 years (Exhibit 1).

Exhibit 1: Eastern and Western Social Development scores, 14,000 BCE-2000 CE

Source: Ian Morris, Social Development (Stanford University, 2010), 20.

1 Morris defines social development on four attributes: energy capture (per-person calories obtained from the

environment), organization (size of largest city), war-making capacity (troops, weapons, etc.) and information technology
(tools for processing and sharing information).

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 Eldred Rock Investor Compass November 2022

To further illustrate, the per capita GDP of England, one of the oldest developed nations, remained mostly
below two thousand pounds until less than three hundred years ago (Exhibit 2).

Exhibit 2: GDP per capita in England/UK adjusted for inflation

30,000
28,000
26,000
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1270 1320 1370 1420 1470 1520 1570 1620 1670 1720 1770 1820 1870 1920 1970 2020

Source: Our World in Data, Eldred Rock.

Coincidentally, in the 1770s, a few major historical events triggered the biggest and fastest transformation
of the entire human society. Technology advancement was a major one. James Watt’s steam engine
combined with fossil fuels generated several hundred times more energy than muscle can, overcoming the
power limitation for the first time in human history. The subsequent emergence of mass production and
transportation significantly increased the productivity of the society.

Of no less importance, Adam Smith’s publication of The Wealth of Nations in 1776 laid the important
foundation for the concept of free markets. He used the term “an invisible hand” to describe the magic
power of a free market. Humans, driven by self-interest and forced by competition, will always try to make
better and cheaper products over time. Due to this immutable nature, humans can efficiently allocate
labor and capital without any top-down instruction, an enduring motor for generating prosperity. Built on
“an invisible hand”, later David Ricardo’s “comparative advantage” explained how exchanging goods
and services through a free market, instead of being a zero-sum game, can create value for all the parties
through division of labor. More trade increases the size of a free market and creates more specialized and
productive labor; the improved productivity brings more wealth for all the trading partners who
subsequently are incentivized to trade more and become more productive. This positively reinforced self-
perpetual motion has brought lasting prosperity to many countries over the last several centuries.

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 Eldred Rock Investor Compass November 2022

The United States is one great example of the free market’s success. In 1776, the country was established
on the belief to protect private wealth, promote free and fair competition, and most importantly preserve
free markets. Because of the business-friendly environment, the U.S. created the largest global market
trade system in only two hundred years (Exhibit 3).

Exhibit 3: Exports network2 as of 2015.

Source: Miranda-Agrippino, S., Nenova, T., & Rey, H. (2020). Global footprints of monetary policies. CFM, Centre for
Macroeconomics.

2 The size of nodes is proportional to their weighted degree (average of all bilateral imports and exports). The thickness of

arrows is proportional to the magnitude of bilateral exports..

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 Eldred Rock Investor Compass November 2022

Globally there are quite a few countries which are also firm believers of free markets, and some are even
more business-friendly than the U.S. (Exhibit 4). More than half of the economies in the top-20 cohort are
from the OECD high-income group. It’s also interesting that practicing free market principles enabled
Singapore to become one of the wealthiest nations despite the country’s authoritarian leadership.
Singapore grew its per capita GDP from below $450 in 1960 to over $72,000 in 2021, a level even higher
than that of the U.S.

Exhibit 4. Ease of doing business score and ranking3 – major developed economies (2020)
Index scores based on each economy’s ease of doing business (100 = easiest)

100

80

60

40

20

0
New Singapore Denmark South United United Norway Sweden Australia Finland Germany Canada Ireland Japan Spain
Zealand (2) (4) Korea States Kingdom (9) (10) (14) (20) (22) (23) (24) (29) (30)
(1) (5) (6) (8)

Source: The World Bank, Eldred Rock.

3 Rankings are show in parentheses next to the country names. Based on 12 regulations that enhance/constrain business

activity (e.g., ease of starting, getting credit, tax regulation).

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 Eldred Rock Investor Compass November 2022

Most macro events, except for a global war, will not easily derail the long-term growth trajectory created
by free markets. As long as businessmen are incentivized to look for safer, easier, and more profitable ways
to do things, progress will be made, and more wealth will be created. As a result, at Eldred Rock, our
research efforts mainly focus on companies from business-friendly regions because investing in those
environments tends to create lots of wealth for patient investors (Exhibit 5). We mostly dedicate our
attention to information driving long-term industry and company returns. We are aware of the macro and
happy to take advantage of the volatility created by the news flow. Regardless of the macroeconomic
environment, we remain focused on applying our well-established, long-term, bottom-up investment
process, and we will continue buying high quality businesses at bargain prices from the desperate sellers
who “temporarily” lost confidence in the structural strength of free markets.

Exhibit 5. Growth of $100 invested in the stock markets since 1972

$10,000
MSCI World Index

$8,000

$6,000

$4,000

$2,000

$0
1972 1982 1992 2002 2012 2022

Source: FactSet, Eldred Rock.