market turmoil

Can One Redeem All?

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As value investors, we have always treasured the opportunity to buy shares at favorable prices for companies we deem to be durable. For many companies, 10 times the annual earnings per share looks like a bargain to us!  

In the recent market turmoil, these kinds of opportunities appeared again. The arithmetic of these situations is interesting: an investment might compound to three times its beginning value over 10 years or so if the company is making annual profits of one-tenth the share price and earnings keep up. 

No guarantees, of course. We could be wrong in our judgment, or some problem could befall the company and upset the theory.  

But suppose shares are purchased in three such companies. If only one pans out as hoped over the 10 years or so, it may be worth triple the beginning value. If the other two are worth nothing, then the combined value of the three may still hover around the original value, as it was 10 years before.  

One could redeem all. 

Better yet, a company that delivers steady earnings over 10 years might be valued at 15 or 20 times earnings in the future instead of just 10 times, based on the steady earnings record. That valuation change might produce profits in addition to return of the original investment. 

Well-known grocery chains, health companies, and food processors may be a fit for this strategy. We cannot know the future, but we believe all these companies will survive—not just one out of three—with the possibility of real gains.  

But even if only one proves durable, that one may redeem all. 

If you are ready to talk strategy as it relates to your goals, please email us or call.


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Outcomes May Vary

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After the recovery from the 2007-2009 financial crisis, we had some time to converse with clients about how well things had worked out in the end. Memories of the turmoil had faded and account values began to make new highs.

The less-financially-involved spouse in a client couple interrupted this discussion to say, “I just have one question. A lot of our friends lost half their money in the stock market, a couple of them even had to go back to work after being retired. Aren’t we in the stock market, too? How come we came out OK and they did not?”

You probably know the answer to her question. Most of the unfortunates who lost half their money turned a temporary downturn into a permanent capital loss by selling out at low levels.

Please notice how we characterized the panic. The failure of big institutions, waves of mortgage defaults, unprecedented action by Congress and the Federal Reserve, massive dollar losses in the markets, and economic turmoil with high unemployment and massive uncertainty are all wrapped up in the phrase “temporary downturn.” But that is not what the unfortunates perceived. It isn’t truly how it felt in real time to nearly all of us who held on, either. We all experienced concern or fear or anxiety.

So we all faced the same circumstances, a series of major economic and financial events that were beyond our control. The thing that mattered, however, was the one thing in our control: our reaction to these events. From the perspective of the long view, by putting these events in the context of history and properly judging them over the decades of a lifetime… we see that ‘temporary downturn,’ not a panic that compelled us to ruin our financial position.

Most of our clients lived through episodes of 10% unemployment before, 16% mortgage interest rates, no gasoline at the gas stations, and inflation devaluing our money at double digit rates every year. This is not to mention wars, assassinations, school children coached for nuclear disaster, and recession after recession. All of these difficulties proved to be transitory, producing only temporary downturns.

Long term investment success does not require perpetual optimism or rose-colored glasses. It does take, however, either a sense of confidence that we will handle whatever challenges may come our way—or a resolution to maintain our investment strategies anyway. We covered the End of the World Portfolio in a prior essay and reached the same conclusion.

From a tactical standpoint, we do need to know where our income will come from, and have the stores of cash we need for short term goals. Our comments above pertain to long-term or permanent capital. It makes sense to consider reducing volatility at market high points if that better suits your needs, and we’ll be talking about that when the markets recover.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.