The history of the stock market can be summed up pretty well: it goes up and down. As for the future, we cannot know for certain whether it will continue to go up and down—or on what schedule—but it seems reasonable to take the liberty of guessing this whole “up and down” thing may persist.
When things are down 20% from their most recent peak, and we recognize it goes up and down, this may well be as good a time as any to invest.
We might have a recession, but current lower prices already reflect a lower outlook. You could say sentiment is already in the mix, already baked into prices. And anyway, where there’s a recession, there’s surely a recovery to follow.
Do we know the timing? Nope. But we never do. (That’s where the whole up-down thing comes back into focus.)
There is much we do not know, but we have faith that perhaps our guesses may be good enough to get by. We believe, for example, that in the future there is money to be made by companies that meet our needs. We have a hunch we will continue to eat, shop, entertain ourselves, wear clothes, go places, communicate, create, and do all those other things humans tend to do. And we have an opportunity now to invest in companies that could provide those things then.
Clients, some things to consider at such a moment as this:
Is there room to start or add to a Roth or IRA?
Should some funds in a stable-but-stagnant form perhaps be invested for long-term growth?
Would a Roth conversion make sense given these lower prices?
It goes up and down. And when we invest for the long run, we commit to the ups and the downs both. One never knows when the trend will change, just that it very well may.
If it’s time for you to add to long-term holdings, please email us or call the shop—anytime.
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In our portfolio management, we try to pick and choose our spots. We’re investing for the long term, after all. We are not indexers; we invest in individual companies for their unique characteristics and the potential behind their story. We avoid knee-jerk reactions to any day-to-day news.
Sometimes, though, the daily news covers an issue that’s big enough to linger. Much of the news cycle lately has been dedicated to the war in Ukraine. The implications for the global economy are profound and have a direct impact on our work.
The war may be accelerating trends that were already there, but now they are more pressing.
OIL, ENERGY, FOOD, & BEYOND
Maybe you’ve noticed at the gas station, but one of the big impacts is the price of oil. In the short term, we foresee great profits for oil companies, but skyrocketing oil prices and energy uncertainty have also renewed interest in the next energy revolution. Solar power and electric vehicles have been on their way for a long time, but the world needs them more urgently than ever before.
These issues are interconnected with trends in agriculture. Ukraine and Russia are not only both food producers: they’re even bigger producers of fertilizers, supplies, and equipment. Agricultural commodities were already on the rise before war broke out, so food producers around the world were already investing heavily in new planting. The journey ahead will be interesting for even “boring” food production and distribution companies, but greater profits may be rapidly approaching.
THE IMPACT OF INTEREST RATES
Those rising prices have energized more interest in durable commodities such as copper and gold, which we’ve been following in our shop for a long time.
But the double whammy of rising interest rates and rising materials costs has a cooling effect on the housing industry, which we have been easing out of by steps. The shortage in the nation’s housing supply persists—and probably will for a spell. For now, homebuilders are a longer-term, lower-priority investment for us.
WHAT THE PANDEMIC MEANS FOR TECH
In times of strife, investors tend to seek comfort and safety, so more volatile sectors such as technology are starting to come back down to earth. We believe this may create buying opportunities in software and internet companies, which are less vulnerable to high interest rates and commodity prices. (They are often light on debt and low on material costs.)
Even as COVID-19 continues across the globe, some areas of life have become more manageable. The air is clearing a little for airlines and travel stocks, although we are more interested in another area of potential: biotech and pharmaceutical companies. While pharmacy stocks may be easing as the pandemic rally subsides, we are looking forward to new breakthroughs in the years ahead. The advances made in the pandemic, we believe, will prove to offer even more applications elsewhere in the future.
TAKING STOCK
The world is a complex place. As always, our thinking evolves on a weekly basis through our research process. Our vision, however, stays trained on these longer-term trends—and what they mean for our longer-term plans and planning.
Clients, want to know what this means for your portfolio? Please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Stock investing includes risks, including fluctuating prices and loss of principal.
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.
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The secrets to success aren’t locked in the past, but they also aren’t waiting to be revealed in some crystal ball. History and context have plenty to teach us, and we ought to prepare as best we can for the future.
But success depends on our ability to move among the past, present, and future. That’s the key.
Imagine if we relied solely on the past. Human tendency leads us to believe current trends will continue. We are masters at spotting patterns and weaving details into coherent tapestries. (Those are the moves that kept us alive when our main job was to avoid predators and find sustenance.)
Today our brains try to do the same thing—to a fault, sometimes. Economic information surrounds us, and we want to find the story in it quickly. The brain wants to spot the pattern and react. When we learn that a company is finding some early success, for example, we want to conclude, “It’s a rocket ship, look at it go!”
Understanding the current trajectory is important, but the patterns of history are especially useful. Every age has fallen prey to some sort of mania. Tulips in 16th century Holland? Tech stocks in the 1990s? Not such different moments. There’s an edge in both knowing the history and being able to apply its lessons.
But what if that’s all we have, the wisdom of history? Well, we miss the big turning points, those moments of departure. We have to understand why and when a change might occur. The future will not be like the past: a proactive approach may keep us ahead of the pack.
In business, even when our past methods and processes have served you and us well, the world keeps spinning: we can expect change, which means we’d do well to keep an eye on potential opportunities, bargains, and possibilities.
My education includes a degree in history. When I was in college and developed a growing interest in business, I spent time on my own in the campus library with The Wall Street Journal and The Journal of Commerce. Like I’ve mentioned before, it’s tough to say which has been more valuable to clients—the history studies or the business reading.
How we got here and where we’re going are two different conversations. So the secrets to success are neither here nor there—literally. They’re in the wisdom in between, and we have to keep perspective.
Clients, if you would like to discuss this or any other topic, please email us or call.
After a long and snowy winter, spring has finally arrived in Nebraska, and it is wasting no time. The weather may be nicer, but the sudden thaw and ensuing floods have turned much of our state into a disaster zone.
While tragic, this was a long time coming. Most folks saw how much snow had accumulated through March and knew that it would be trouble when the weather warmed up. We all know how the cycle of the seasons work, and it should be no surprise that winter is followed by spring.
The markets, like the seasons, are cyclical. After a certain point, a bull market turns into a bear market, and vice versa. Summer turns into winter; winter turns into spring. But investor behavior can sometimes overlook this important fact.
Imagine if someone looked around at how cold and snowy it was at the beginning of the month and said “There’s even more snow than there was last month! At this rate there will be two feet of snow on the ground by May!” Obviously, they would sound quite foolish.
But is this really any different than investors who, late in a market rally, say “The market is higher than ever! At this rate it will be even higher in a few months!”
We know how market cycles work. Like the weather, we are not able to predict exactly when the turning point will come. But we know that it will happen eventually, and as contrarians the stronger the trend is the harder we expect the turning point will be.
Sometimes we temporarily look foolish—a bubble may persist for years after we expect it to burst. The fellow predicting snow in May probably would have felt vindicated by how much snow got dumped on us the first half of March, after all. We would rather miss out in the short term than miss a key turn in the markets altogether, though.
To everything there is a season: a time to buy, a time to sell. Clients, if you want to talk about the markets (or the weather), please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk including loss of principal.
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 gap between consensus expectations and reality as it unfolds is where we think profit potential lives. This is why we put so much effort into studying trends, and the ramifications for investors.
One year ago, we wrote about four trends. The next energy revolution (solar + batteries), long range prospects for the world’s most populous democracy, the airline industry, and rising interest rates continue to play roles in our thoughts and portfolios.
Other ideas are also in play.
1. Thinking about the next few years, our highest conviction idea is inflation will exceed consensus expectations. Some of the ways we act on this belief may provide some counterweight to other portfolio holdings, since inflation hurts some industries while it helps others.
2. As the economic expansion lengthens toward record territory, the desire to extend our lifespan tends to be insensitive to the business cycle. Biopharmaceutical companies, working on cures for everything from Alzheimers to various forms of cancer, seem attractively priced.
3. The trend toward rising interest rates, noted last year, may have an effect on weaker and more leveraged companies. We are looking to avoid the second-order and third-order effects that higher rates may have on some borrowers.
4. US stocks have become popular relative to international equities, with dramatic outperformance over the past decade. At some point the trend changes, and better value usually wins out.
One of the difficult things about being contrarian–going against the crowd–is that we sometimes look silly. When everybody else is having more success in the short run while we search for bargains, it can be tough. But that is what we do. We’re excited about the continuing evolution of your holdings as the future unfolds.
We can offer no guarantees except that we will continue to put our best effort into the endeavor. Clients, if you have any questions or comments or insights to add, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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.
One of our core investment principles is to “avoid the stampede.” If you read this site regularly you have heard us say this over and over again, but we think it bears repeating.
As part of our work we talk to many product representatives who want a slice of our business. There are countless product providers out there competing for our attention, and your money. There are limited amounts of both to go around, so inevitably most of the wholesalers that talk to us are going to be disappointed. However, we still like talking to them as they do us a vital service: they tell us which way the stampede is going.
We are contrarians by nature. When we hear someone tell us that a lot of people are buying something, our instinct is not to line up alongside them. When a lot of people tell us that a lot of people are buying the same thing—our instinct is to run far, far away.
Lately, what we are hearing from the product wholesalers is that everyone is piling into exotic alternative investments. Everyone is looking for exciting new products that are not correlated to stock market returns, and boy, are the product providers ever ready to sell it to them.
We live in uncertain times, and it is understandable to be spooked at some of the troubling headlines we see. We understand the desire to seek safety. But, we believe that safety is not to be found from following the herd. Omaha is famous for its stockyards and slaughterhouses; we know that when the cattle are all getting steered together, it rarely ends well for the cattle.
We know there are always uncertainties with the economy and the markets. But the sales pitches we hear for everything non-correlated to stocks makes us feel a lot more secure in our traditional equity investment philosophy. There may come a time when the herd starts stampeding back towards equities and it will be time for us to look elsewhere. For now, though, our equity focus puts us in lonely company when it comes to wholesalers—and that is just how we like it.
If you want to talk about any market trends or sales pitches you may have noticed, please feel free to call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
In the novel The Sun Also Rises, author Ernest Hemingway gives us an insight into an interesting mechanism. One character asks another how his bankruptcy happened. The reply? “Two ways. Gradually and then suddenly.”
It seems to us that many things in the economy and markets happen the same two ways. Prices rise slowly at first, then gain momentum. Or a market stalls and declines slowly for a time, then falls swiftly. Or business activity, at the bottom of a recession, begins to tick higher, almost imperceptibly, until it takes off.
And in our own affairs, we see the same situation. We talked recently with a client in her middle 70’s, who noted she now had higher income than at any point in her working years. Compounding builds wealth only gradually for a long time, then (it seems) suddenly.
(People who are liquidating investment balances with overly large withdrawals see the same thing, in reverse. Balances decline gradually, then suddenly.)
An important part of our work is helping people visualize those inflection points for trends that are nearly imperceptible at first. When we first begin to save a small amount each payday, it is hard to see the fortune that might emerge over time. And when markets seem to be just slogging through the mud month after month, positive changes are tough to imagine. Our role is to help people see how this works.
The same mechanism applies to our work in researching investments. For example, there are sectors that have done well in recent years, with abundant liquidity in a period with easy monetary policy. But we have seen this movie before: liquidity dries up gradually, then suddenly. This specific issue is on our radar.
The challenge is that investment prices and economic indicators have a lot of volatility in the normal course of events, most of it meaningless. Most years, the major stock market indices rise about half of all days and fall about half of all days. Not everything is a trend happening gradually at first, then suddenly. Some of it is just noise. We work hard to sort it out.
Clients, if you would like to talk about this or anything else, please email us or call.
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.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
From time to time, we meet people who are devoted to avoiding the worst selloffs in the market. When there are so many simple statistical tools available to keep track of the trend, they say, it makes no sense to stay in the market when the trend is against you.
For example, by selling out when the major stock market indices dip below their 200 day moving averages, and buying back only when they climb back above, one could have avoided significant damage in the worst downturns.
The problem is, one could also have avoided some really sharp recoveries from low levels. And in any lengthy test of these mechanical rules, generally they would have cost money to implement.
The key question is, what fraction of your total returns would you be willing to give up in order to get a smoother ride along the way? Would it be OK to have 30% less money after twenty years? 20% less? 40% less?
Our point is, there is a cost to the human preference for stability. There is no free lunch. The trend-following systems that save you from damage also tend to water down your results over the long term.
We believe we get paid to endure volatility. Living with the ups and downs when so few are willing to do it…that’s what we do. We seek to understand what fraction of your money can be invested for the long term, without regard to volatility—and invest for you on that basis.
The markets have had volatile spells, but year by year results have been positive since 2009 in the major averages1. We know that sooner or later, unpleasant times are going to come around.
Our principles may hope to offer some cover from overvalued markets. Avoiding stampedes and seeking the best bargains may or may not limit the damage—we have a mixed record, and no guarantees. With the uncertainties of the markets, and the impossibility of knowing the future, it is comforting to have principles by which to operate.
Clients, if you would like to talk about this or anything else, please email us or call.
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. All indices are unmanaged and may not be invested into directly.
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.
All investing involves risk including loss of principal.
Money poured into tech stocks in the late 1990s. Then it went into residential real estate in the middle 2000s. No wonder: prices marched higher, year after year—until they didn’t.
We humans usually believe that recent trends will continue. When friends and neighbors and coworkers are getting in on the action, it is easy to join them.
A powerful narrative that seems to be creating a lot of wealth is hard to resist. “We have entered a new era.” “This time is different.” “You can’t lose money in real estate.”
Popularity pushes values farther and farther away from the underlying economics, and a reversal usually follows. The bubble pops; a great number of people are surprised. Some end up with losses instead of the gains they felt sure about making.
Our analysis suggests that a new kind of bubble is upon us. The zero interest rate policy or ZIRP of the Federal Reserve Board for most of the past decade led to a scramble for yield. This moved the valuation on many kinds of investments that pay income into very rich territory, in our opinion.
For example, we were recently pitched on a “cash substitute” with a 5% yield, in a supposedly liquid form. Sounds great, right? Perhaps too good to be true.
Indeed, when we took the proposition apart, we found it was made largely out of corporate bonds in financially weak companies—junk bonds, in other words. To make matters worse, the manager pursued opportunities in a thinly-traded part of the market—odd lots, small amounts of each bond that are unattractive to other buyers.
This idea will work until it doesn’t. When the next economic slowdown creates cracks in the theory, investors who believed they owned a “cash substitute” may be sensitive about losses of any size. As they cash out, the manager may be forced to sell into a market with even fewer buyers.
The silver lining for us is that dislocations bring opportunities. Prices overshoot in both directions. One of our roles is to try to spot these anomalies, and figure out which ones are attractive opportunities for you. (We have no guarantees of success in this.)
Clients, if you would like to talk about this or anything else, please email us or call.
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.
All investing, including stocks, involves risk including loss of principal.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
One popular piece of market lore revolves around the idea that virtually all of the stock market’s cumulative gains over large chunks of the past have come between November and May. The other half of the year, from May to November, has produced little in the way of gains, on average. Hence the saying, “sell in May and go away.”
There are three challenges facing anyone who seeks to act on this supposed wisdom. The first one is, any widely expected event gets discounted by the market as it gains currency with the public. If the saying works, it will get overexposed until it stops working.
The second challenge is, the statistics on which the lore rests are averages—they say nothing about what happens in any particular year, much less about what will happen this year.
The third challenge is the most interesting of all. When one examines the results of notselling in May and never going away, one wonders what more could be desired. I (Mark Leibman) was born in May 1956, when the S&P 500 Index stood at 44. As I write this, the index is 54 times higher. This calculation of a 5,300% profit excludes dividends, which would have added considerably. This tells us how not selling in May would have worked over the past nearly sixty years.
Our purpose in writing is to help you avoid being tricked by the “Sell in May” idea into a short-sighted investment decision. There are always reasons to worry about the future, developments which alarm people, and fear mongers peddling pessimism for profit. Against the dynamism and ingenuity inherent in human endeavors, these fears and worries have yet to produce a permanent downturn in the economy or the market.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
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