A Wild Week
Whew…what a week! It brings me back to my first year in the industry. I reported to work the first week of January 2008. Little did I (or anyone else for that matter) know we were on the doorstep of a huge market downturn. Looking back, I’ve always felt that was a great experience to live through early in my career because it was a vivid lesson on what can happen in financial markets at any time.
Before the crisis and my career, I was fortunate to have taken a deep interest in investing. Therefore, I had read a lot about market history and knew that big swings in financial markets were actually quite normal. If anything, they usually presented great opportunities for those with the insight and courage to buy when everyone else was panicking.
I was also fortunate to be indoctrinated with the principles of value investing which provides a framework for assessing investment decisions. It is most important during times like these when the headlines are grim and confidence is shaken. The lessons never get old, but one’s conviction gets tested every so often therefore it’s always time well spent to revisit them.
THE NUMBER ONE PRINCIPAL of value investing is recognizing that stocks represent ownership in a business. If there is one thing to remember that will help you keep your wits during a sell-off, it is this.
Imagine you own a private investment portfolio of 30 businesses. In other words, there is no stock price to check. The companies are vastly diversified across industries and possess some of the world’s most valuable brands. Some do most of their business in the United States, others have large revenue streams from around the world. All the companies are managed by high powered teams of executives.
The question I’d like you to ponder is, if you moved abroad for 3-5 years and couldn’t check in, how worried would you be about your companies? Upon return, I think most people would expect that some of their businesses would have done great while others faced some challenges. It is the nature of business. But the chance that all 30 companies go down the tubes is probably extremely remote.
The point of this thought exercise is to remember there are 30 companies in the Dow Jones Industrial Average. Many do possess some of the world’s most valuable brands and as a group, are highly diversified and run by great management teams. Here’s the most recent list:
|American Express||Goldman Sachs||Pfizer|
|Apple||Home Depot||Proctor & Gamble|
|Chevron||Johnson & Johnson||United Health|
|Cisco||JP Morgan Chase||Verizon|
There aren’t many people I know who would bet that, as a group, the above list of companies would be doing worse on the basis of sales and profits in 3-5 years. But it’s amazing how people’s perceptions change as soon as you add a daily quoted stock price.
Markets can do crazy things that are disconnected from economic reality. The fact that the Dow Jones Industrial Average was at an all-time high only about two weeks ago makes my point. Remember what the Dow Jones represents…basically the collective market value of the 30 companies in the index. As of this writing, the Dow Jones had shed about 15% since peaking. But in reality, has the true value of those 30 companies really changed that much in two weeks?
The answer is probably not. What changed is sentiment. For whatever reason, the financial markets woke up to the fact that the spreading coronavirus is likely to cause some economic damage. The fact that there likely will be a slowdown shouldn’t create panic however. There always have been events like this that create setbacks and it is guaranteed there will be more in the future. Despite this, I always like to remind clients about where the Dow Jones has been over time. Consider the trajectory over your life-time:
|Year End||Index Level|
The numbers are truly amazing (and they don’t even include dividends). They’re more amazing when you consider all the major events that have occurred since 1940 including WWII, Korea, Vietnam, the Cold War, oil price spikes, inflation, terrorism and many other cases of epidemics (SARS, Swine flu, Ebola, etc.).
As value investors, we actually look to these types of shocks to create opportunities. Again, stocks represent ownership in businesses. Value investors strive to assess the value of a company were it to sell in a private transaction and buy at a discount. During sharp selloffs, like the current one, often times the baby gets thrown out with the bathwater. Great bargains can become available. But to capitalize, it is essential to keep your nerves. Remember, stock prices can shoot up and down, but over time, it’s the earnings power (profits) of those companies that matters most.
You may be supposing, based on my remarks, that I’ve received an abundance of panicked phone calls this week. As of this writing on Friday afternoon, I’ve received one email and zero phone calls regarding market conditions. I’d like to think it’s because we’ve made a consistent effort to set expectations and communicate the way we think about investing.
Of-course, no one likes to see their accounts take a hit. But if you’ve positioned yourself appropriately, making sure you have adequate liquid assets and or guaranteed income, a periodic market downturn shouldn’t be cause for excessive worry. That said, we’re always happy to chat with you about your accounts or broader market conditions. It’s also always a good idea to revisit your comfort level for equity exposure. These events will ultimately pass. In the meantime, the strategists in our core holdings will be looking to put money to work at attractive prices.
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