A pastime of mine is enjoying driftwood fires on the Platte River, just outside beautiful downtown Louisville. With the changes in the weather, a recent trip to the river got me thinking.
There’s an idea—often attributed to Greek philosopher Heraclitus—that suggests, “No one ever steps in the same river twice, for it’s not the same river, and they are not the same person.”
Each day, we experience new things. These events bring us joy, sadness, pain, elation. Some events change us by an inch. Others change us by a mile. Some changes are flighty. Others are permanent.
But we change daily.
The market has been acting like this proverbial river lately. From a distance, not much has changed. But if you look closer, you’ll see it differently. Small victories. Temporary setbacks. The ebb and flow of new information.
We have a sense of where the market is flowing. But just like an actual river, there are no guarantees (Mother Nature has her ways, right?).
As the river makes anew, it brings me more driftwood. Which allows me to continue my pastime. Which prompts me to recognize that each fire is different—and the observer is different too.
Clients, if you’d like to talk about this or anything else, email or call.
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We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop.
Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.
Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10.
Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How?
It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.
Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in.
But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down.
Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them!
Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.
Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic.
As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!).
Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage.
Clients, when you have any questions about what this means for you, please call or write.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Investing includes risks, including fluctuating prices and loss of principal.
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Time travel is a powerful way to reframe the present. Our collective present is full of challenges and setbacks, but what will this moment mean to you down the road, looking back?
If you’re prone to stay mired in the moment, here’s a game of “I spy” for you: where are the setups among all these setbacks?
You’ve heard it from us before. There’s day-night, day-night. There’s up-down, up-down. Well here’s one for these challenging times: setback and setup.
Some of our acquaintances are facing tradeoffs big and small right now. Less time for work… but more time with the kids. Less time with the gym buddies… but more time out in the sunshine.
In terms of business, our classic principles still apply here. We seek bargains. Economic activity is shifting. Some areas have slammed on the brakes as demand has fallen off; some areas are buzzing in a scramble to keep up with demand.
Just like the setbacks in our individual lives, the business setbacks exist alongside potential setups. Part of our job is to take a good look around to try to spot them. No guarantees, but we wonder what future growth is being watered by the current storm.
We’re not ignoring the storm. This approach, however, helps remind us of the bigger picture. It’s a more complete way to tell the story of a setback.
Clients, if you would like to talk about this or anything else, please email us or call.
Kurt Vonnegut wrote about a race of beings who could see in four dimensions. The fourth dimension is time. “All moments, past, present, and future, have always existed, always will exist.” They could look at different moments from the past or future the way you and I might look at a stretch of the Rocky Mountains.
This is an interesting way to think about the work we do together with you, planning for the future. It requires us to see the future we want, and do what is needed to make that plan potentially become reality. People in their working years need to see ahead a decade or two or three, and envision the future.
Our investment process relies heavily on history, being able to see the past. Most conditions in the economy and markets repeat from time to time in one form or another. We can better understand these things when we know what has gone on before. In other words, seeing the past may provide clues that help us in the present.
The Vonnegut quote contains an implication with which we strongly disagree. The idea that the future is already set implies that nothing we do matters.
In fact, our whole philosophy is that the choices we make are crucial in shaping the future. There are many things beyond our control, but we control our actions. We do not control the future, but we can work to make the best things more likely to happen.
Putting this all together, we can formulate our own idea about life in four dimensions: learn from the past to shape the future we desire. When we work together, we have a better chance to pull this off.
Clients, if you would like to talk about this, or anything else, please email us or call.