View from the Chair: Windermere's Market Perspectives (January 2019)


There has been no shortage of words to describe the market environment as of late: “worst one day percentage decline, largest single day move, recessionary indicator, trade war, interest rate fears” - and the list goes on and on.


Going forward from here, we believe only one word matters - CHOICE

Investing has always been about choices. Let’s take a look at a few of the decision points when it comes to investing and the current choices we are suggesting.

1) Stay invested?

After a quarter like the one we’ve just been thru, it is very tempting to exit the markets and hold cash. It gives us back a feeling of control and prevents further loss. It’s certainly a choice you can make. But you must consider the longer-term ramifications of that decision

  • First, look at the expected return of cash. Currently, money market funds yield about 2%, which is also an estimate of current inflation. So on a net basis (return less inflation), cash is a zero-returning asset. That’s better than negative right? Sure - but keep in mind there is little chance it’ll ever be much greater than zero (ie: not much potential for future upside)

  • Second, you must look at the expected return necessary to help you meet your long term goals, whether that is retirement, career change, travel, etc. A financial planning exercise can help you determine this return number. Of course, there are a lot of variables, but it’ll at least give you some context

  • Third, match the two up. Does a cash portfolio (at net 0%) equal or exceed the return you need to meet your goals?

What’s our choice as it relates to staying invested? Absolutely! The opportunity costs of not being invested are far too great to bear

2) Where to invest now?

If you also decided to stay invested in #1 (good job!), now the question becomes where to invest?

In order to make this choice, you first need to know where it is you are trying to get to. Yes, I’m talking about your financial plan again. Without that plan and an idea of what return you need to achieve, you’re flying blind. But once you know that target return number, you’ll likely be looking at a combination of the three main buckets for investment - cash, fixed income and equities

(1) Cash

Why own it? Serves an important role of a source of immediate liquidity and source of funds that can be added to other asset classes on a pullback

(2) Fixed Income

What is this again? a debt security where you are the lender and the borrower could be a variety of entities including, a municipality, or the US government) exchange for your capital, the entity promises to pay you a stated interest rate and ultimately your money back at maturity

What’s the outlook? While interest rates have risen, they remain low by historical standards. For example, as of this writing, the US 10-year treasury pays ~2.7%. There is also a significant supply of debt available (for a variety of reasons including actions taken by the Federal Reserve in the financial crisis and companies issuing debt at low rates) that may very likely keep rates lower for longer. Also keep in mind that rates are likely to rise from here and there is an inverse relationship between the price of a bond and interest rates. As with all investments, proceed with caution and obtain specific advice for you & your goals

Why own it? Likely to provide a lower long term return but also helps to offset volatility in a portfolio. While bonds may be known as the “safe” asset class, there are still many complexities to these instruments that should be carefully understood - especially in a rising rate world

(3) Equities

What is this again? An equity (or stock) is a share of ownership in a business. With an equity investment, you participate in the earnings and cash flow of the business

What’s the outlook? The return you can expect from any equity is based upon how the business does over time - and also on the price you pay for your ownership

Let’s start with how the business will perform. Of course, this will vary greatly by business but lately, some macro concerns have been weighing on virtually all stocks (think recession fears and trade). While we recognize these risks, we remain of the mindset that they have been more than reflected in current prices and that certain businesses and sectors can and will continue to grow and generate meaningful revenues and cash flows in the future. We also don’t see an imminent recession and are expecting a resolution on trade. These risks are not to be ignored but we don’t see them as a reason to avoid equities. You should have at least a 3-5 year time frame with equities and always keep in mind the longer-term averages (see below)

Now, how about the price you pay? After the recent sell-off, the price you’ll pay for an equity is lower than historical averages. Current valuation of the US stock market is about 14x earnings and many stocks trade well below that level. (Note: an earnings multiple can be “flipped over” (ie: divided into 1) to obtain an implied return (in this case, 7% (or 1/14)). Why not buy some equities on sale?

Why own it? While there is more volatility and possible downside risk in equities, they also provide unlimited upside. For past 20 years, compound annual growth rate of S&P 500 is 6% and that return rises to 10.7% over the past 90 years for which returns have been tracked. Depending on your aggregate return goals, the potential upside available in equity ownership may very well be necessary

What would we choose between the three? All of the above! How much of each and what kind? That of course varies for everyone and we suggest you carefully develop a portfolio that meets your specific needs

3) Stay Home or Travel?

When looking at your equity allocation, you also need to choose if you’ll buy US companies or if you’ll travel to international markets. International markets lagged the US for much of 2018 due to a variety of factors included a strong US dollar, trade fears, and rising US interest rates. However, remember what matters with equities - how the business will perform and the price you pay. On both counts, certain international markets are great candidates, as the businesses are benefiting from growing populations, a shift to consumerism and a growing middle class, and strong economic expansions and the current valuations are far below those of US companies, providing an attractive entry point. In addition, you may also consider US companies that have a material amount of international revenue to access these international markets.

Our choice? We’re traveling and including international allocations in balanced portfolios (in accordance with the aggregate plan of course!)

Investing is a series of choices and with each one, we have to do the best we can with the information we have. Take your time, consider the facts, control your emotions, think long-term, and choose wisely. This part of your life is far too important for you to do anything less.

Invest on,


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

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)

5.)    Valuations

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.


Invest on,