Excellent discussion from Scott Grannis

Economist Scott Grannis just posted a discussion of the role of business innovation versus the role of government and Fed policy in the aftermath of the Panic of 2008-2009.

We recommend that every investor head over to his blog, the Calafia Beach Pundit, and check it out. The concepts he discusses in this most recent post, entitled "Why zero rates are not driving the equity rally," should be carefully studied by all investors.

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Composite performance through 12/31/2009

The composite performance for the Taylor Frigon Core Growth Strategy and Taylor Frigon Income Strategy data is now posted on the Taylor Frigon website from inception through December 31, 2009.

The Core Growth Strategy is managed according to the time-tested investment philosophy which we have tried to explain to readers in the pages of this blog (in posts such as this one and this one, for instance). It solidly beat broader market indexes such as the S&P 500 and the Russell 3000 in 2009, and also in 2008, as well as for the entire in the period since its inception in January 2007.

We point this out in order to provide our readers with some confidence as they compare the assertions we make versus the many other arguments and theories that fill up the airwaves and bookshelves of financial media stations and the investment sections of local bookstores and libraries.

It is important to stress that we do not believe that any one year -- or even any three years -- is actually enough time to evaluate the true validity of an investment philosophy. There are numerous studies which show that money managers who outperformed the broad market over very long periods almost invariably had periods of three years or longer in which they underperformed considerably. This famous address given by Warren Buffett in 1984, as well as later research on the subject, bears that out.

We have always urged investors to take a long-term perspective, since for most of them what happens over a period of thirty years (or longer) will be far more important.

See the Global Investment Performance Standards (GIPS) for more detail on performance reporting standards, and here for our GIPS disclosures.

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Solid convictions versus "snake oil"

As we reflect on the lessons of 2009, some of which we have discussed recently, one thing that strikes us as very important to pass along is the fact that the events of 2009 validated strong convictions that we have held and preached for almost two decades.

Over the years, we realize that we may sound like "a broken record" (how's that for an expression that has been bypassed by the rapid advance of technology!) because we always come back to the time-tested truth that investors should focus on ownership of great businesses and not get caught up in the widely-held belief that "investing" is about anticipating the next market move one way or another.

We even alluded back in October 2008 to the fact that our message often seems "boring" in times of easy sailing, but that it is times of great turmoil that prove its worth.

It was those years and years of honing those convictions, however, that stood us in good stead during the global financial crisis, and enabled us to write "Don't get off the train" in early March, 2009 and to know exactly what to say to investors who were tempted to jump out of their investment positions at the very darkest hour of the storm.

We believe that a solid understanding of these core convictions can help investors to avoid the dangerous but alluring call of the various schemes and systems of market-based (as opposed to business-based) anticipation, which we have referred to previously as modern-day forms of "snake oil."

Thus, our timely warning not to "get off the train" and our later March 13 post saying that if mark-to-market accounting rules were changed "we believe the economy -- and the markets -- can recover much faster than most investors realize" -- which is exactly what happened -- were not examples of our being able to predict the markets, but just the opposite. They were evidence of the value of the right set of long-held convictions which show their true worth when things are most chaotic.

Now that the dust has cleared somewhat, we believe investors should reflect carefully on this valuable lesson.

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The importance of good leadership at companies in which you invest

In the past, we have often mentioned the basic definition of a Taylor Frigon growth company using the words of Thomas Rowe Price: "dynamic, capable management operating in a fertile field of future growth."

Today, Morningstar published the name of their winner for CEO of the year, Stericycle's Mark Miller. This selection comes as no surprise to us, as we have long been owners of shares of Stericycle, and have mentioned the company in previous posts as an example of a well-run company in a fertile field of future growth.

It is interesting that the same Morningstar article mentions past recipients of the leadership award, and that the two other companies specifically mentioned by name are also ones that we have long owned in our managed portfolios, Strayer and Fastenal.

While we do not agree with everything Morningstar advocates in terms of their approach to investing, nor with all the views of the writer of that particular article, we find it an interesting confirmation of the importance we place on the quality of the leadership at a company in which we consider investing capital.

The principals of Taylor Frigon Capital Management own securities issued by Stericyle (SRCL), Strayer Education (STRA) and Fastenal (FAST).

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Ben Bernanke's non-New-Year's Resolution

Here's a clip that Bloomberg television posted of Fed Chairman Ben Bernanke denying that the Fed's easy monetary policy had anything to do with speculation and the massive mis-allocation of capital that took place during the past decade.

It had nothing to do with the Fed cutting rates to 1% and holding them there for thirteen months, making borrowing money nearly free in relative terms.

Chairman Bernanke's denial is questionable, at best, and we have laid out the case implicating the Fed's oversteering in great detail previously, such as in "The long shadow of the Y2K bug." Those who doubt the direct causal link to the most recent crisis should take a glance at the enormous spike in CDO (Collateralized Debt Obligation) issuance depicted in this graph, beginning in 2003 and accelerating during the Fed's easy-money policy.

Unfortunately, not many expect the Fed Chairman to come out and say that he and his predecessor share tremendous responsibility for the carnage of the past decade, or to state his New Year's Resolution (or New Decade's Resolution) not to do it again. Mr. Bernanke, after all, is seeking Congressional approval for his reappointment -- his job is at stake here. Ultimately, his statement is in line with the way we should probably expect a government bureaucrat to behave.

This realization, however, should give investors an important insight. Government bureaucrats and politicians are going to go on enacting less-than-perfect policy. Yet in that less-than-perfect environment, entrepreneurial innovation and value creation by well-run businesses continues, and those who search for those opportunities and participate with their own capital can experience exceptional growth.

This is an important resolution for investors to consider at the start of this new decade.

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For later posts on the same topic, see here:

• "Glenn Beck is an economic butterbar" 11/04/2010.

• "Likelihood of Fed over-steering increases" 01/25/2011.

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