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.My book is currently in the editing stages and should be published before Thanksgiving. Without giving away too much, I’ve been sharing snippets from it over the past few months and thought I’d share another extract from Chapter Three on Market Timing which relates to today’s volatile market move and our strategy to weather such storms in our dividend paying stocks which are selling for significantly less than the broader market averages and those overpriced FANG stocks which don’t pay dividends. Hope you enjoy the preview!
When clients ask what they can do, we advise that people all over the world are likely to continue drinking Pepsi so hold on to your Pepsi shares and keep collecting the dividend. Don’t worry about things outside of your control. We’ve been through all kinds of strife over the past two decades: Gulf wars, 9/11, the real estate meltdown, yet the world continues to revolve and good companies continue to thrive.
That’s not a popular opinion and not what many investors (or media outlets) want to hear. What they want to hear — and what herd advisors tell them — is “We’ll protect you by getting you out of the market when the correction comes, either by liquidating your equities, hedging your portfolio, or putting in stop losses. None of these strategies actually protect investors and instead tend to deteriorate returns over time. Instead, investors should think of investing as owning a company, not merely buying a stock certificate.
I hope to continue helping my clients for many decades to come. How silly would it be for me to wake up one morning and decide to sell my company because I have a headache? Then, after lunch, since I “feel” better decide to buy it back. And finally, at day’s end, feeling tired and worn out, decide to sell it again. It makes no sense but that’s what herd advisors and traders on television advise their clients to do.
Instead, I prefer to invest in the best people and technology and continue to passionately and competently pursue long term investments for our clients. I prefer to think of our investments as buying a piece of a business. We’re buying a piece of Ford and we’re going to hold that business for the long term unless the valuation becomes untenable. It’s trust in a long term perspective, as opposed to a trading perspective. We’re going to collect our income and stay invested. Despite all the turmoil of the past twenty years, none of our retiree clients had to go back to work. None of our clients had to go find jobs during the financial crisis. They just kept collecting their income.
A lot of people who invested in sexy growth stocks that plummeted couldn’t collect income and were unable to fund their retirements. They had to alter their retirement outlook and lifestyle. It may have been easier for their advisors to sell them on what was hot and on what would ostensibly protect them against downturns, but it’s certainly no easier now for their clients with depleted assets.
The primary reason our clients never had to go back to work is the 4% – 5% income stream produced by their “simple” balanced 60/40 stock/bond portfolio. In contrast, the current environment of passive/alternative/ETFs strategies utilized by the majority of advisors produces little income and incurs only the hope for price appreciation to fund existing or future retirements.
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”