On rare occasions the market takes on a speculative bent as animal spirits run amok. For us value investors, during these periods, it’s always hard to believe that the others, whose behaviour is so odd to us, are competing in the same field. Why would anyone ignore fundamentals, buy purely on price, chase what’s already gone way up, use highly-speculative instruments, assume extreme leverage, or worst of all, purchase something that’s hugely popular—gone viral—a ‘meme’ stock?

The economy, now booming thanks to massive government stimulus and zero interest rates, should accelerate further in the near term as pent-up demand is unleashed. There are notable concerns which could cause the markets to ebb—especially since stocks in general are priced for perfection.

Investors should not take either of these extreme stances. Without a crystal ball, it’s extraordinarily difficult to time tops or bottoms. Speculation is accompanied by too much risk— outsized declines can arrive at any time. Sitting in cash and waiting for a better entry point can have the opposite effect as business valuations generally ascend with the march of time—so most returns are made from being fully invested to benefit from the lift in underlying security values.

While markets could continue their ascent, we believe that extended valuations and exuberance should at least temporarily cap market indexes. We remain defensive, holding some cash and/or a reasonable sized hedge, while we continue to hunt for undervalued high-quality businesses, both here and abroad, especially since overseas investment options are cheaper than comparable U.S. shares.

While we haven’t been chanting at the office, we have taken a defensive stance toward the markets. While the overall markets and many of our peers now appear to be all about offence, we are concerned that the recent overzealousness has stretched valuations too far. The markets are above our estimate of Fair Market Value (FMV) at a time when the economy may struggle to fully revive.

The meaning of ‘may you live in interesting times’ is controversial. Some argue it originated as a Chinese curse. We embrace that assertion because we’ve always responded to, “interesting times, huh?” with, “a little too interesting!” Turbulence, tension, and a feverish pace should be relegated to roller coasters, entertainment or, perhaps, between the sheets. But for the status of the world around us, we root for the mundane. We’ve just endured anything but.

Recipes have been likened to culinary road maps. At Generation, we have our own defined processes, including specifically designed tools such as TEC^TM, TRIM^TM, TRAC^TM and TVM^TM, to guide us. And like recipes that get handed down from generation to generation, we’d like nothing better than to pass along our processes to future generations—both ours and yours.

Buying the most statistically undervalued companies can be quite lucrative but can also expose investors to deteriorating businesses—some are clearly cheap for a reason. On the other end of the spectrum, the highest quality businesses tend to be fully priced—some unduly, due to their popularity—so high quality investment opportunities can be scarce. Hence, the quality quandary.

Much has been said recently about the underperformance of value stocks relative to growth stocks. Historically, over the long term, value stocks—those with lower relative multiples—outperform growth stocks—the high flying, glamourous ones that tend to trade at lofty multiples of earnings, cash flow, sales and book value.

We don’t buy value stocks per se. We buy undervalued stocks. There’s a difference.