Remember Tug of War? Something tells me you may have played on the playground or at a family reunion. Split into two groups (ideally of equal strength), pick up your respective ends of the same rope, and pull as hard as you can. Eventually, one group prevails - whether it be due to momentarily greater strength, uneven strength from the outset, the other side running out of steam, or one teammate simply not pulling their weight.
I’ve been thinking a lot about this game lately as I watch the daily equity market action. It seems that we have a classic game of tug of war going on – between Team Positive Factors and Team Negative Factors
Playing for the Positive Factors team is an impressive roster, including:
1.) Record earnings growth
2.) Rising US economic growth
3.) Rising leading economic indicators (including housing and labor)
4.) Increasing cap expenditures
5.) Tepid inflation
6.) Sufficient liquidity
7.) High confidence (consumer and businesses)
8.) Corporate actions (M&A, stock buybacks, dividends)
Lining up on the equally ambitious Team Negative Factors is:
1.) Trade wars/tariffs
2.) Strong US dollar
3.) De-synchornized global growth
4.) Political events (midterm elections, North Korea)
6.) Tightening monetary policies
7.) Flattening yield curve
8.) Future earnings projections (may have peaked?)
On any given day, at any given minute, the rope gets pulled closer to Team Positive Factors – only to be quickly pulled back the other way and on and on this pattern continues. Both sides are worth adversaries and have come to this match with the requisite strength and stamina. Each team member has their strengths and weaknesses – and each have the possibility of swaying the match.
This current game of Tug of War is nothing new. Markets are constantly involved in these matches. They vary in duration, players, and equality of teams (2017 was hardly a fair fight) – but they are always present and markets forever swing between two opposing teams. It’s easy to get distracted by the back and forth – so what’s an investor to do?
Step back – and remind yourself what the rope is made of: individual stocks.
These individual stocks aren’t simply blips on a screen or tickers, being jostled around in different directions as the match continues. Rather, they are ownership interests in actual businesses - a share of a productive asset that is earning revenue, investing in R&D, entering new markets, buying back its own stock, issuing dividends, pursuing acquisitions, and a whole host of other activities designed to benefit shareholders. At times, the price on the screen will be reflective of what the company and its future cash flows are truly worth. And at other times, there may very well be a disconnect. Knowing how to tell those two apart is far more critical than the broader market’s internal grudge match. Remember what you own and why you own it. And realize that a price decline is just a piece of information and will not necessarily determine the long-term value of the underlying business (just as a rapid price rise may not truly represent an increased long-term value of the business). As Warren Buffett always says, he loves when the prices of his stocks go down as it gives him a chance to buy more at a lower price.
I know what you’re thinking – you still want to know who will prevail in this most recent game of Tug of War. No one knows that answer – and that answer will vary by the minute until a new match ensues. But over the long run, I believe the clear winner will be a disciplined investment approach focused on the long-term, structured with overall financial goals in mind, and comprised of ownership in many businesses who are well positioned to win countless of their own Tug of War matches over time.