View from the Chair: Windermere's Market Perspectives (September 2018)


"Timing is everything"  This age-old saying can be applied to so many areas of our lives - including investing.  Lately, it seems like timing is on top of a lot of investors' minds.  Questions such as: 

  • Is it time to get out of the market? 
  • Is it time to go all in? 
  • Is it time to rotate out of technology stocks? 
  • Isn't it about time for a recession? 
  • If this the longest bull market, surely it should end soon? 

All of these are fair and valid questions but if any of us knew even one of these answers with 100% certainty, we would be financially set for life, having mastered the markets years ago. 

Timing the market is essentially impossible.   So the question is really not if the time is exactly right - but instead if the asset class(es) considered for investment have the highest likelihood of being the best vehicle for the compounding of your wealth for the foreseeable future. 

While watching a recent Warren Buffett interview, I heard him articulate this concept perfectly:

"I can't tell you when to buy stocks, but I can tell you whether to buy stocks"

His point is exceptionally well taken.  While one can never be sure if today is the precise right moment and best price to buy stocks, one can do analysis to evaluate which asset class presents the greatest probability of compounding your wealth over time.

So let's instead look at that question and some factors worth considering in your analysis:

1.) Risk assessment - How do you define risk?  Is it the volatility in price?  The potential for the price to go down from where you bought it?  Or is it permanent loss of capital?  Evaluate what you are afraid of - and then assess whether a given asset class presents more of that risk than you can handle - and more importantly, whether you are being paid to assume that risk (see next)

2.) Evaluate alternatives -   Assess the risk/return relationship for your available options.  In today's environment, you have cash equivalents providing ~1.5% annual returns, US 10 year bonds providing 3% returns, and the broader US equity market providing an nearly 10% YTD return thru August 31st.  Is the incremental return on equities enough to compensate you for the additional risks?

3.) What do you wish to own - Pay attention to what it is you actually own via your investments.  Do you want to own productive assets (ie: one with earnings power, cash flows, innovation, employees, ability to return both dividends and profits to you).  Or, do you wish to own non-productive assets that are priced solely on a formula or by what others are willing to pay you for them.  Equities are shares of productive assets.  Bonds, gold, and currencies are examples of non-productive assets  

4.) Underlying environment - There is unlimited amounts of economic data one can analyze and assess to determine the status of the underlying environment and economy.   While making this assessment, it's critical to consider whether the environment is supportive of your chosen asset class being able to rise in value.  So in the case of equities, does the environment support growth that will drive further sales, ongoing innovation and productivity gains, stable to growing cash flow, etc.  In the case of fixed income, are interest rates likely to rise (potentially hurting principal values but allowing coupons to rise) or fall (with opposite effects)?  In the case of cash, is inflation likely to erode purchasing power driving real returns negative?

As you can see from the above discussion, timing actually isn't everything.  Instead, time IN (the right place) is what matters.

Invest on - and let time do it's job,





View from the Chair: Windermere's Market Perspectives (August 2018)

2018 sits in stark contrast to 2017 when it comes to many things - including investing and the markets.  After a steady climb in 2017, where almost nothing could stop the upward movement across virtually all asset classes, 2018 has been a much more challenging investment environment.

Emerging markets have faced headwinds from a rising US dollar.  Developed markets have encountered a similar fate.  All international markets have been reacting to trade war fears.   Bond markets have traded mostly sideways in light of rising rates, somewhat offset by ongoing demand for US dollars (and treasuries). Broad-market US equity indexes have been the leading asset class for the year but upon closer look, the gains have been somewhat concentrated in certain segments (ie: growth and small cap).

stay in your lane sign

It’s very easy in a market environment like this to question your investing approach.  However, just because an approach underperforms in a given time period doesn’t mean that it is not the best approach for you and your long-term goals and risk parameters  Investing is a non-linear process and it is entirely possible you will be on the “wrong side” of things at various points in time on your journey.  So what do you do?  Take this advice from a recent road sign I saw – “Stay in your Lane”    It’s that simple.  Give ample thought and energy to developing an investment plan that works for you and then stay in your lane.    

We are doing just that with our portfolios.  Here are a few characteristics that have, and always will, define our “lane” (as it relates to equity securities)

1.)     Buy a businesses  - remember what an equity security represents.  It’s ownership in a business  - a productive entity that is generating revenue, incurring expenses, hiring, innovating, and producing cash flow.  We keep our focus on the business, the management teams that run them,  the environment they operate in, and their growth outlook over a reasonable time horizon – not just on the daily ticker tape

2.)     Price matters  - the ultimate return you will earn on a given investment depends on many things, chief among them the purchase price.  It’s easy to be drawn to a business that has a rising stock price and high growth rates.  However, overpaying for a stock almost always guarantees a poor return in the end.  You are buying a share of a business’ future earnings and cash flow  - so doing work upfront to figure out what that is worth today is an essential exercise

3.)     Focus forward – every investor has moments of “would’ve, could’ve, should’ve” – mostly as it relates to timing the market (I should have sold XYZ on this date, I could have bought into this company at it’s IPO, etc).  The list is endless – and also mostly irrelevant.  Learn the lesson, evaluate what you can do differently next time, and focus forward.

4.)     Patience is a virtue – there is a different between a broken business and a broken stock.  A stock may not perform as our research and analysis tells us it should.  That alone is not a reason to abandon the position.  Markets are efficient but they are not psychic and value can be present inside a business and not yet fully reflected in the share price.  Understanding the businesses we own and analyzing their ability to generate future revenue and cash flow oftentimes lead us to remain patient and wait for our thesis to play out

5.)     History may not repeat, but it rhymes – Markets move in patterns.  It’s impossible to time these patterns but it’s usually highly likely that they will repeat themselves.   Today, we have an investing bias towards large-cap businesses and are international and value focused.  These are not the categories that have been outperforming (rather, it’s been small cap, US, and growth names that have led).  However, we remain committed to our thinking and believe in time, the trends will once again reverse (as illustrated in the below charts from Charles Schwab & Co., Inc) (click on images and scroll thru)

There are many other items that define our lane but this gives you a good idea of how we look at markets and investing. 

How would you define your lane?  Are you able to stay in it, even given the challenging market conditions are find ourselves in?   If not, keep adjusting and work towards that goal.  The journey is definitely worth it.

Invest on,