Find the bargains. Own the orchard for the fruit crop. Avoid the stampede.
Our three main principles form a pretty clear constellation, guiding our practices here at 228 Main. They are action-oriented, so it’s not hard to tell day to day whether we’re sticking to them.
But what makes us stick with them, especially if we’re bracing for a downturn?
In life, when the going gets tough, our defenses can erode pretty quickly. Our energy flags. Anxiety kicks in. And loss can trick us into believing that good times will never return, that the hurt wins.
Writer and businessperson Arianna Huffington suggests a simple way to get sound decision-making back on track: choose love.
“You’ve got to make your heart bigger than the hole,” she says in her book Thrive. “You just have to make your decisions out of love. And when we make the decisions out of fear, that’s when we have problems.”
Trouble and triumph, set-ups and setbacks—those are constants, and our lives travel the roads back and forth to each. Why should we let fear take the wheel for any part of the journey?
Clients, we know that you’ve felt these truths: it’s part of what makes you the best clients in the whole world, after all. Let this be a reminder, then. We’re with you. We journey together.
When you’d like to talk about this—or anything else—please write or call.
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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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Tolstoy’s great novel Anna Karenina begins, “All happy families are alike; each unhappy family is unhappy in its own way.”
This seems like stretching a point. In my life, I’ve had the good fortune to know many happy families, all quite different. But the quote does capture the uniquely lonely feeling that can come with misery.
The market, we believe, operates in much the same way. Bull markets can cover up a lot of performance differences, and although no two bull markets are quite alike, most investors are generally going to be happy regardless.
But each and every recession hurts in a unique way. We just have to wait.
The market behaved very differently in the tech wreck of 2000–2002 than it did in the Great Recession seven years later. And what we see now is different than either of those!
In a conventional recession, heavily cyclical companies like manufacturers get hammered hard. But cyclical companies generally understand the boom-and-bust cycle and plan for it with their savings.
Consumer goods companies on the other hand might take it for granted that people will keep buying food and clothing and other necessities, so they generally do not keep as much cash on hand. The short, sharp shock we experienced earlier in the year took out a lot of retailers that might have weathered a longer, shallower recession.
Homebuilders are normally one of the biggest casualties in a recession, but they are doing booming business now. So are the companies that make the materials they work with. Many big tech stocks, normally volatile and erratic performers, have been scorching the markets.
This is a stark contrast to the 2007 recession, when the housing market cratered and took out a lot of homebuilders, or the 2000 recession, when growth tech stocks got demolished.
In all likelihood, those previous recessions helped set the stage for these sectors’ current outperformance. Going into this downturn “everyone knew” that homebuilders were going to get wrecked because it happened last time.
Perhaps in five or 10 years there will be big opportunities for investing in restaurants or cruise lines as the next recession prompts investors to flee the businesses that got hit hardest in this one. No guarantees.
Every downturn is different, and we have no way of knowing what the future will hold. All we can do is stick to our principles: avoid the stampede and seek out bargains. Sectors that get trashed in one recession may be found in the bargain bin before a different recession. This is why we study and keep our eyes open.
Clients, if you have any questions, please call or email us.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Some say the seeds of future gains are planted in the downturns. The future is always uncertain, but the past is not: we know many investments can be owned for less money today than last month or last year.
As we go about our work, we are seeking three kinds of bargains.
Great companies available at good prices.
Cyclical companies at low points in their cycle.
The best bargains in the investment universe, wherever they are.
Often, the companies we most admire seem expensive. We know farmers that are always excited to talk about buying their favorite iconic tractor maker. We hear the same thing from parents about the entertainment conglomerate that makes the movies and runs the theme parks their children enjoy. Downturns sometimes reduce stock prices to attractive levels.
Everyone knows that recessions usually hurt company revenues and profits. We are thinking how the inevitable recovery might improve revenues and profits. That long view improves our appetite for temporarily depressed cyclical companies.
Some of our favorite past bargains have come from the sector politely known as “high yield bonds.” (You and I can use a more descriptive term, junk bonds.) From time to time, at rare intervals over the past twenty years, we have found something we believed to be investable hiding in the junk pile. Times might be ripe for that again.
Now is the time. We are studying and thinking and researching to make the most of it.
Clients, if you would like to talk about this or anything else, please email us or call.
In ancient Rome, it was customary for the city to throw lavish triumphal parades in honor of victorious generals. The whole city would turn out to celebrate those who had brought glory to Rome. For a successful general, it was an intoxicating reward.
Lest their generals become too intoxicated with success, however, the Romans would assign a servant with a unique task. Their job was to follow the triumphant general throughout the festivities and periodically whisper in their ear memento mori: “Remember, you are mortal.”
It is humbling advice, and one that we would do well to remember. The markets have had several great quarters lately, leading to the Dow average topping the dizzying benchmark of 20,000 points for the first time last week. We have no way of knowing how high it may get in this rally or the next, either.
We do know one thing, however: no rally lasts forever. No matter how high the market soars, it can always drop back down. We don’t know when, and we don’t know how much, but someday that day will come. There is always a recession in our future.
Our goal is to try to minimize the damage by avoiding stampedes when we see them. When investor sentiment gets overly exuberant, when we start hearing people say “You can’t lose money in the stock market”, this is when we must pay heed: “Remember, market rallies are mortal.” We are confident that in the long run the markets may bounce back from future downturns as they have always done before and we can potentially be better off afterwards—but the recovery will undoubtedly be slower and more painful if we fall into the trap of thinking that our portfolios are invincible just because they’re doing well now.
We’re thrilled with our performance over the past year and excited about the continued evolution of our portfolio strategies. At the same time, we know that nothing lasts forever. At some point in the future, we will have to reckon with another downturn. It might be in a year, or it might be in five years. Either way we must keep this inevitable fact in mind if we hope to try to mitigate the damage. If this weighs on your plans and planning, give us a call or email us to discuss your situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
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