“The ideal of calm exists in a sitting cat.”—Jules Renard
It has certainly been a rocky start to 2016! Stock markets around the world have now seen a minimum of 10% declines, spurred on by a continued fall in oil prices, and a general panic amongst many investors. Indeed, emotions have ruled the last few weeks, bringing awareness to one of the most difficult parts of investing: sticking to a strategy in the midst of impulsive fear. No doubt many are wondering if this is the next 2008 (or 1907, 1929, 1987, 2000 etc.) and what we, your advisors, are doing about it. Hopefully this writing will give you much-deserved peace of mind, and a renewed confidence in our investment strategy.
First, let us start by saying we fully understand the fear that everyone is experiencing—the feeling of being sick to one’s stomach and the strong desire to sell. As difficult as it may be, we need to look at the investable landscape rationally, unclouded (as best we can) by emotional reaction, which studies have proven time and time again to reduce portfolio performance. Adherence to a strategy is one of, if not the most, important components of investing success.
What is the best reaction in times such as we have experienced in the last few weeks and months? Take a cat as an example: when on the hunt, it lays seemingly calm and patient, allowing the situation with its prey to unfold. When the time is right, they spring into action. For roughly the last year, we have been holding an excess of cash in accounts, waiting patiently for the right opportunity to present itself. This has had two benefits: first, it insulates us from excessive losses (such as over the last three weeks); and second, it allows us to go shopping after many other investors have found the exit and driven prices down steeply. Now that we have seen substantial drops in world markets, what is our strategy at Concinnity Financial? Here are a few key areas where we see opportunity:
Oil: High prices from 2008 to 2014 spurred exploration, ultimately leading to oversupply and the present price collapse. Current drastic cuts in exploration and production seem to be setting the table for the next long-term rise in prices.
Energy Sector: Many large energy companies are very attractively priced for the long-term. (Buy low, sell high!)
Emerging Markets: The collapse in energy prices and concern over China’s economy have driven markets downward in many developing countries. Many companies are attractively priced with large growth potential. (Today’s losers are tomorrow’s winners!)
United States Markets: We see a short-term (1-3 months) rebound, but a mid-term (over the next year) continued downtrend in stock prices.
Europe: Some countries are historically undervalued. The European Central Bank (the equivalent of our Federal Reserve Bank) seems committed to extending stimulus measures in efforts to boost the European economy.
In sticking to our strategy, selling after a 15% decline in the S&P 500 does not make nearly as much sense as does BUYING at presently discounted prices. In spite of all of the doom and gloom in the headlines, there were some exciting developments in the markets this week. Aggressive buying, and the corresponding sharp bounce in prices following session lows on January 20th, reinforce our belief in a short-term rebound. The chart below (UPRO, a fund that tracks the S&P 500 multiplied by three) illustrates how many investors were buying in late December at relative highs, and subsequently sold on the way down.
It is not a perfect science to time the market, or to avoid any and all portfolio losses. However, remaining objective and buying when many are fearful can lead to attractive purchase points on investments that we believe have strong future potential. Certainly, we are well aware of some portfolio constituents that have not lived up to expectations in the short-term. However, the recent market declines offer a great opportunity to lower our average purchase price and further capitalize on potential future rebounds. In the above chart, I believe we can all agree that the objective investor who SOLD high to the greedy at $64, and subsequently BOUGHT low from the panicked at $44, certainly made wise investment decisions that likely contradicted their emotions (and other investors) at the time.
In closing, in spite of our completely natural, emotional response to short-term market declines, it is vital to temper those feelings with a rational mindset. Our thinking when making purchases over the last three weeks was, “Hey! What great sale prices!” Over time, we hope to help you achieve the same mindset: one that avoids emotional pitfalls, and maintains a focus on longer-term portfolio performance. It is a continuing possibility that many investments will go “on clearance” in the near future. Let’s be determined to have the objectivity—and the cash on hand—to go shopping at those discounted prices, setting the table for future returns.
In confidence,
Nicholas Rossolillo and Stephen Ertel