Paul Moore's stock to buy and hold for the next 25 years

When PM Capital's CIO and founder Paul Moore was a green-eyed industrials analyst at Bankers Trust (BT) in the mid-1980s, he asked a question about BHP (ASX: BHP) to his superiors. 

"If you think it's overvalued and you don't like it, shouldn't we be zero?"

Paul was asking a question that still rings true (and arguably is more true today). If something is a good investment, you buy it. If something isn't a good investment, you don't. And you must also be prepared to break away from the consensus. 

For Paul and his PM Capital team, the strategy is to find high-conviction investments which possess structurally strong storylines and attractive valuations. It's a philosophy that has helped the PM Capital Global Companies Fund (ASX: PGF) return 13.5% per annum since inception for more than 25 years. 

To mark the first 25 years of PM Capital and to look ahead to the next 25 years, I sat down with Paul recently to discuss the lessons, the changes, and the ever-interesting outlook for global equity markets.

What has changed in the last 25 years?

The first, and most important change, has been the secular decline in interest rates.

"When I first entered the industry, home loan rates were at 17%. So to see them being offered at negative rates just a couple of years ago was quite remarkable," Paul said. 

But now that inflation is higher and rates could be higher for longer, Paul thinks we've entered a new regime which could last another 25 years.

"The risk now is that every time they [central banks] do go to ease again, that inflation comes back," he said. 

The second biggest change has been the mentality shift among investors. 

"[Volatility] is not a measure of risk at all. It's just a measure of short-term price action. And the biggest risk going forward is people's inability to get an acceptable rate of return," he said. 

The biggest lesson from nearly 40 years in markets

Paul learned his biggest lesson in investing early in his career. In 1986, Paul became the portfolio manager of the BT Select Markets American Growth Fund. Not long after taking over the fund, Paul invested a majority of the fund in US financials. In the first month after those investments were made, fund performance fell 7% (while the market increased 3-4%). 

"[Management] were putting a lot of pressure on me and basically because they were so paranoid about their short term performance," Paul recalled. "They were trying to scare me out of those positions."

Five years later, that same fund was the top-performing mutual fund in the country. The moral of this story is to stick to your guns.

"All my biggest mistakes have been when I've let outside thought processes interfere with my conviction. Now, sometimes it's because you haven't done enough research and so people can put doubts in your mind or maybe you've taken shortcuts. But the bottom line is you have to be able to stand your ground," he said. 

Paul's two long-term bets: Financials and commodities

Paul's appreciation of global financial stocks continues to this day. Today, the fund holds positions in a range of financials companies including banks and non-bank firms. 

"We have positions in European domestic banking franchises, the Commonwealth Bank (ASX: CBA) equivalent overseas in Europe. Then we have some US banks like JP Morgan (NYSE: JPM), which has the best in-class balance sheet," Paul said. 

"The fundamentals have changed for the banking industry [in Europe] in terms of inflation. They've now dealt with their regulatory capital issues. So now they can pay us back the cash flow. I'm on double digit dividends next year. That's extraordinary," he said. 

But long-term, Paul also admits that banks continue to be hit ("punished") by the regulators. As a result, Paul owns a non-bank financials name which he believes will be a beneficiary of regulator activity.

"That's exactly why we own Apollo Global Management (NYSE: APO) because they're the beneficiary of what the regulators are doing to the banking system in the US, and ultimately around the world, because they can effectively take the place of the bank in terms of lending money. Until recently, [Apollo] were a single digit P/E [business] growing at 15%," he said. 

Paul's other long-term thesis is a "higher for longer" base case for commodity prices. The team had been working on buying strong commodities-linked stocks since before the COVID-19 pandemic, waiting patiently for the right time to buy in. 

"Originally, we were looking for the best copper ore bodies like Freeport McMoran (NYSE: FCX). That's the first stock we played and it's been a great performer over the last couple of years," he said. "But what you find is that one or two of these stocks do well and the rest get left behind."

"Post-Freeport, we put our money into Teck Resources (NYSE: TECK). The reason for that is it had a big emerging copper business, but the market wasn't valuing at the time because they were building it out," Paul said. "But that big mine is going into full production just at the end of this year. That's why it got bid for as a takeover offer," he added.

And finally, after the fund made its profits in Teck Resources, it moved its money into Grupo Mexico (BMV: GMEXICOB). Grupo Mexico owns 90% of the American firm Southern Copper (NYSE: SCCO) but was available for a much cheaper valuation compared to just buying Southern Copper. Grupo Mexico is now the fund's main copper play.

Why Paul is not playing catch-up on mega-cap tech

There is another often-quoted adage in investing: stick to what you know. Paul learned this early on his career when he had a crack at biotechnology companies. 

"I soon learned that I had no idea what I was doing," Paul quipped.

He tends to feel the same way about the largest technology names. Not because they aren't good businesses but because someone is always willing to pay too much for them.

"There's always some tech that's perpetually overvalued because people that know these businesses really well will pay up for them," he said. 

He points to the story of Cisco Systems (NASDAQ: CSCO). In the 2000 TMT bubble, Cisco went from a little-known stock to trading at over 100-times earnings before coming back down to 10-times earnings in the space of a decade. He believes similar things are happening again where some companies are just too overvalued in spite of forecast earnings downgrades.

"We're short Apple (NASDAQ: AAPL). I wouldn't own any of the others," Paul said.

A final challenge for Paul

To close our conversation, we asked Paul to name a company that he would hold for the next year, the next five years, and - naturally - the next 25 years. 

He did not take the bait on the first one, arguing that owning a stock for only 12 months or less is akin to a "lottery". 

On the second time frame, Paul nominated Grupo Mexico. 

"I'm pretty convinced that the back half of [this] decade is when copper is really going to come to its fore because that's when the absolute volumes of the EVs and all the net-zero stuff is really starting to kick in. At the moment, the percentage increase is very high but not the absolute volume whereas by 2030, it's going to be big absolute numbers," he said.

And finally, the stock he would hold for 25 years - Dutch brewer Heineken (AMS: HEIA).

"It's got a great brand. It's been around 150 years. They're slowly building out that brand throughout the world. It's family-owned so they can take that long term approach. It's being offered to us at a reasonable valuation because of concerns over emerging markets. And I know it's gonna be around in 25 years."

Bottoms up, Paul!