We have a very few clients who always call or email when the market sells off asking what we should do and why it is happening. The honest answer of course is that the stock market is declining simply because there are more sellers than buyers when panic sets in and investors move to the exits. There doesn’t have to be one specific reason - particularly in today’s algorithmically driven market. There is a proliferation of passive ETFs and mutual funds which are driven primarily by large growth/momentum stocks (i.e. FANG – Facebook, Amazon, Netflix and Google) which have begun to sell off from high valuations. When fear or greed overcomes the market, stock volatility is exacerbated as mathematical algorithms hit certain levels driving sell or buy signals. Thus, selling by computers begets more selling and in the reverse, buying can beget buying.
We don’t currently own Nike; however, this is not due to some patriotic position for or against the company’s recent ad campaign featuring Colin Kaepernick. Instead, it is based upon an unprejudiced review of Nike’s valuation, financials and its paltry 1% dividend payout.
Charlatans and unethical scam artists don’t come right out and tell you they are attempting to make you part with your money while providing absolutely no value. The most skilled will tell you they are doing something altruistically and that they want to simply teach you what they’ve learned – for the small price of a subscription service or enrollment into their more intensive (and more expensive) classroom lessons.
The past week has continued the recent pattern of extreme volatility this year with major indices again moving into negative territory year-to-date. Though I will publish the more comprehensive market and economic quarterly newsletter soon, I thought I'd share a portion of the chapter on Media Madness from the book I'm currently writing. I hope you find the snippets from the chapter more useful than the "experts" shouting advice encouraging you to take rash action.
I'm in the only business in which no one wants to purchase something when it is 25% lower in price!
This past week, a client asked the good question of why we would purchase a company such as Mattel which has declined in value and sell or trim our positions in companies which have risen in price - particularly when the company doesn't pay a dividend which is generally at the core of our philosophy and critical to our client's future retirement success. Because this question goes to the core of our investment process, I thought I would share my answer with our friends, clients and investors. My reply email is enclosed as follows: