Altrius Capital Blog

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Rise of the Machines – And How to Beat Them

Posted by James Russo on February 8, 2018

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Today's 1000+ point plunge for the Dow Jones Industrial Average can be attributed primarily to algorithmic, programmed trading. In an absence of any particular news during a trading day, the massive selling (or buying) that occurs during the opening or final hour of a trading day illustrates that a good deal of selling is occurring because of broken technical market levels which triggers further selling and a negative feedback loop. In addition, the massive rise of passive investing in indexes - which are laden with overvalued growth stocks unlike the reasonably priced value-based, dividend stocks we own - is major contributor to the recent sell-off as valuations come back down to earth for such overpriced companies.

So, when will the selling end? Honestly, I have no idea. As individual investors have just begun to enter the market in force this year (when they were beginning to feel good again after a nine year rally), many may get scared out of stocks and sell thereby placing further pressure on the market.

What's our strategy going forward? It is times like these which answers the question as to why we own bonds. Interestingly, over the past few years, a few of our clients actually complained about the 6.1% annualized returns our bonds have produced over the past decade (our U.S. stocks returned 9.13%) asking why we didn't have more invested in stocks. The answer of course is that we don't know when a market correction will occur and it is important to own assets which will not fall as dramatically when such stock market corrections come along. The turtle does win the race over time. Currently, our balanced portfolios (Altrius Global Income strategy) hold approximately 56% in stocks; thus, we are certainly not overly aggressively positioned as I have mentioned during the past few quarterly newsletters.

Why owning individual bonds and stocks is preferable to complex mutual funds and ETFs. This week witnessed the absolute unraveling of some highly leveraged, inverse ETN products which are more complicated than many financial professionals can even understand. As Leonardo DaVinci so succinctly states: "Simplicity is the ultimate sophistication." As such I believe that continuing to collect income from the dividends and interest from the individual stocks and bonds we own is preferable to owning complex products in which one has to hope it goes higher in order to fund their retirement income needs.

As an illustration of our process, I'll leave you with another few excerpts from the book I'm writing this year:

I consider it my responsibility to try to alleviate worry for our clients. Obviously, it's not always possible to do this, but I try to provide leadership and prevent them from panic when times are difficult. I recall a client who wanted to vacate the market during the financial crisis of 2008. We sat down and went through his portfolio stock by stock. I told him "Pepsi is still paying you a dividend and I believe they will continue to do so. Do you want to sell Pepsi? How about Unilever, AT&T, Pfizer or Microsoft, all of which are paying dividends with yields over 5%? Even though they're down in value right now, they're still paying you a dividend." He wisely agreed to stay invested and we still own these companies at much higher valuations today.

In addition to humility, I believe a portfolio manager should have what my ninth grade religion teacher at Seton Hall Prep described as sticktuitiveness. While extoling character virtues to fortify one for life, Fr. Kilcarr counseled us on the importance of dogged persistence. I believe that not getting scared out of stocks during times of market tumult and displaying the fortitude to remain invested long term is critical to long term success. As in my flying days, investing is similar in that you should be prepared for turbulence along the route, but if buffeting winds cause you to panic and parachute out of the plane, you certainly won't reach your destination. We cannot control the weather but we can plan for uncertainties and stick to our flight plan because it assures the best chance of safely reaching our target. Investing in the stocks of sound, dividend-paying companies can help alleviate the mistake of selling when a stock's value is lower. The reason is you are still being paid a dividend.

Peter Lynch, author of his insightful books "One Up On Wall Street" and "Beating the Street" wrote that "stocks are not lottery tickets; there are companies behind them you don't need to rush." He has also stated (as I firmly believe) that "the key organ in your body is your stomach, not your brain. It's always going to be scary, there's always going to be something to worry about, and you just have to forget about all of that. If you own good companies, you'll do well."

It's why, unlike Wall Street, we eschew high-flying fad stocks and momentum investing in favor of investing like our mascot, the aardvark. Like me, the aardvark is big, slow and a bit ugly. He's not a big game hunter. He's not hunting for Amazons and Teslas or trying to find the next hot dot. He eats the easily foraged food, like ants. What ants are to the aardvark, dividends are to our firm. They are the easily foraged returns. The aardvark hunts at night, alone and unafraid. He's contrarian by nature and has his own unique phylum. There's no other animal quite like him. He has giant ears, which he keeps raised to be mindful of what might go wrong while he is foraging for dividends. He has big sharp claws, ideal for digging deep to uncover value. He works well into the night and is diligent in his search. I think the aardvark is a pretty cool animal and accurately reflects who we are as an investment firm. Wall Street we are not.

As always, we appreciate your confidence and trust. Please do not hesitate to contact us should you have any questions.


"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"

- Warren Buffett



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Topics: Dividends, market fluctuations, Financial Advice, Advice

Written by James Russo

Founder & Chief Investment Strategist