One of the key reasons for the very low turnover in our portfolio is that we are growth investors. On average, we hold companies for at least 10 years, and we have invested in many longer than that. For a growth investor, this is a sensible approach. After all, we are seeking to benefit from the growth of the companies in which we invest, so the longer we let that growth compound, the better off we will be.

This desire for longevity in our investments, to take advantage of the power of compounding  ̶ what Einstein termed “the eighth wonder of the world” — leads us to look for persistent growth trends within the economy and seek companies that are benefitting from them. One of the longest tenured of these themes in our portfolio is the one we refer to — with great fondness — as our Bread, Booze and Bling theme. As people’s incomes rise, so do their abilities and aspirations when it comes to what they choose to spend their money on. Here’s a visual representation of the idea, known on our team as “the George Evans Hierarchy of Human Needs Pyramid.”

Exhibit 1: Hierarchy of Needs

Over the last 50 years, people’s living standards have risen significantly in most countries of the world, as you can see below.

Exhibit 2: GDP Per Capita in 1960 and 2014

For instance, Indonesia, with the world’s fourth-largest population, has experienced ten-fold income growth per person, up from $1,000 in 1960 to $10,000 in 2014, after adjusting for inflation and purchasing power differences between currencies.1 (This is well-known to one of the world’s largest food and personal care companies, which has been operating in Indonesia for nearly 100 years; their revenues and profits there have grown at roughly 7% a year.)

Meanwhile, China’s per capita income has grown ten-fold over the past 50 years as well, and India’s has grown by a factor of five. More than a third of the world’s people live in these two countries. Here in the U.S. – the third most populous of the world’s countries  ̶  per capita incomes have risen nearly three-fold and remain among the world’s highest.2

The point here is that the spending power of the world’s people has been rising for quite some time, and there is nothing to suggest this will reverse. This has particularly been the case in some of the world’s emerging markets, where so many people are entering the middle class for the first time. By some estimates, middle-class spending will increase by $10 trillion over the next five years.3

With their rising incomes, people are able to move up the spending pyramid. They can buy more, enjoy more variety, and gain access to better food and personal care – to the benefit of food producers, retailers and consumer goods companies. (This trend can be hard to discern in many high-income markets, where brands are losing some of their power with consumers who have never lived without regulatory safeguards. But branding is powerful in markets where consumer safety laws are still relatively new or nonexistent.)

They are able to buy branded beers instead of home brew, or buy two bottles instead of only one, or try a glass of vintage wine, or a single malt Scotch. And let us not forget the bling. The human need to signal status and success is innate to us all, and luxury companies have a keen understanding of this.

We own companies that are profiting from all of these activities. In our opinion, their moats are sufficiently deep, and the demand trends are strong enough to sustain them for many years to come.

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