Today's 2%+ market sell-off has certainly unnerved some investors. Like any market move in the short-term, it's important to take a deep breath and think about your long term goals as we assess our outlook and strategy. So, has anything changed?
Especially considering today's strong jobs report (the initial reason for the sell-off), little has changed from an economic and market standpoint since I sent our detailed financial slide presentation and quarterly summary a couple of weeks ago. In fact, the broader market indices are still higher for the year. That said, as I've mentioned in recent quarterly newsletters, the broader U.S. market indices have grown a bit frothy and are certainly due for a pull-back. This is especially true for high-flying, very expensive growth/momentum stocks of which we do not own.
We remain focused on lower-priced, dividend paying companies, both here in the U.S. and overseas while also remaining somewhat underweight stocks in our balanced portfolios. However, our portfolios are certainly not immune to natural market corrections and investors must be emotionally prepared for such movements to be successful over the longer term. With the 10-year bond now rapidly approaching 3% in anticipation of the Federal Reserve raising interest rates, we also continue to avoid "safer", investment grade bonds in favor of high yield, junk bonds which are generally less interest rate sensitive and should perform much better in a rising interest rate environment as they have in the past. It is in fact the good economic news which is spooking investors who fear the economy overheating too quickly thereby forcing the Federal Reserve to raise interest rates more dramatically than the three expected increases this year.
As the title of this blog indicates, the classic quote from Bernard Baruch displays the difficulty of investing when things are good since investors are worried that the market is due for a sell-off and also investing when times are difficult (and everything is cheaper) due to investors being afraid that stocks will fall further in price. I'm writing this sitting in an airport waiting to fly home to the New York City area and on my way to the airport, my Uber driver asked if the market was going to go higher or if a crash about to come. I answered honestly that I had no idea as both could certainly occur and that investing takes a tremendous amount of fortitude to think longer term and not worry about the day-to-day market variations. It's why I prefer dividend paying stocks and bonds to provide our clients and investors with a steady stream of income which enables us to patiently be paid to wait as stocks move through these natural cycles and eventually - over time - rise in value. It's why I always say that one must think like a business owner in the companies we own rather as an owner of some shares of stock as business owners don't buy and sell their companies time and time again in the course of a year. Instead, like my business over the past twenty years, good investors take a disciplined, longer term approach and remain focused on growing earnings rather than worry about the price of the business - while also importantly collecting a salary (your dividends) along the way.
I'm writing a book this year (want to be published by Christmas) which illustrates our unique investment process, but also discusses the mistakes investors make when investing. I've included an excerpt below from Chapter 2 which is pertinent today which I believe you will find of interest. As always, please don't hesitate to call or email me directly should you have any questions about your portfolio, your personal financial planning needs or our outlook and strategy. Your primary financial advisor and our entire team at Altrius also stands by to assist you with any of your financial concerns, but should you email me on a Friday or Saturday evening at midnight, it is likely you will receive an email back as I'm up doing some of my best research at that time!
Excerpt from Chapter 2 of my book Invest Like an Aardvark (not yet complete):
An analogy I use about trading being hazardous to your wealth relates to flying. Fighter pilots are trained to take immediate actions in emergencies. If they have an engine failure, the first thing they are trained to do is execute a certain set of procedures to try to get the engine restarted. If after some initial attempts, the engine doesn't re-start (particularly when the ground is quickly approaching), they eject.
In flight school, we were ingrained with these procedures. We drilled and drilled so they became second nature. In times of crisis, you may be paralyzed by fear and incapable of rational thinking, but your training takes over and you respond automatically. If you train properly and rely on your experience, you won't do anything stupid.
Training for KC-130 pilots differs from initial flight training as the aircraft is not equipped with ejection seats. Thus, we Marine KC-130 pilots used to joke that the first procedure for an emergency is to "sit on your hands and think," meaning don't touch anything. Don't do anything stupid in the heat of the moment.
Investors frequently do something stupid in the heat of the moment or when they are frightened. There is always a reason for investor anxiety: presidential elections, terrorist attacks, Brexit, government shutdowns, Bird flu, Y2K, wars, the list is endless. While the pundits claim to know what these events mean, the truth is that no one knows for certain how the economy and investors will react to any of these events in the short term.
Twenty five years later, I still recall my flight training and our unofficial emergency procedure to sit on your hands. For investors, the procedure should be don't panic and start trading in response to today's news. Don't sell stock in Pepsi due to some event a newscaster or pundit stated was critical. Sit on your hands and first consider whether the crisis of the day has any bearing on the number of Pepsi's consumed in India. If the answer is none, you shouldn't be trading.
JAMES M. RUSSO
Founder/Chief Investment Strategist
Altrius Capital Management