Traditional business fundamentals are finally being rewarded again, driving our performance


Chris Davis: First, is in terms of the environment that we're in, we view this as a return to rationality. We were in a bubble that really began with the financial crisis with near zero interest rates. We view what's happening in the economy and in the markets as really a return to normalization. We'll give you some background on that. This is an environment where fundamentals finally matter again, it's right in our wheelhouse. Durability, profitability, cash production, balance sheet strength, valuations, all of these things finally matter again.
We think index investing, and Danton's going to share some data with you on why we think it's going to be riskier than many may believe, that selectivity is really going to matter. We all know the story of the Magnificent Seven, up something like 100% percent, trading at 35 times earnings, that puts a lot of risk into the market. In that environment where those few companies drove so much of the return, it's one of the reasons we're really pleased that in 2023 we were up 30%, 400 basis points or so ahead of the S&P on average, and we think with a lot lower risk.
Finally, and when I talk about low risk, part of that is looking backwards, but the most important part is looking forward
You can see here, if we look at the selectivity of the portfolio, we own relatively few companies less than one in 10 of the S&P 500, but look at this valuation differential. Here they are trading at about half the valuation of the S&P 500. We think that is extraordinary because we're still getting great growth. Look at the attractive growth here, almost 12% growth over the last five years. We call this a value investor's dream, to have this attractive growth at such discounted valuation. We think that positions us going forward.

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