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To deploy client capital in a way best suited to meet the client's financial needs and then constantly keep watch over that capital to respond to the opportunities and pitfalls inherent in today's financial markets.

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Q2 2020 Investment Update — A Time Like No Other

Posted by on May 11, 2020

A few days ago, I finally had the chance to read Warren Buffett’s latest shareholder letter. It contained a good reminder of a key reason we buy and hold stocks of great companies — to go along for the ride as successful enterprises re-invest profits in their key businesses to expand upon already existing profitability, in turn generating compounding wealth for patient shareholders. The letter was written in February before the full picture of COVID-19 emerged. I didn’t get to it till recently in part because of trying to respond to the investing challenges posed by the pandemic. Arrival Capital attempted to protect clients first by ensuring there was enough cash to cushion accounts against a severe economic downturn and to provide capital to take advantage of emerging opportunities, and, second, to remove from client accounts stocks in companies that were so adversely affected by the outbreak that their long-term profitability and even survival were realistically threatened. But after raising cash and removing impaired companies from client portfolios, the true work of investing goes on, which is to maintain and add to a diversified portfolio of profitable companies that are priced below what they will be worth in the future because of reinvesting in their businesses as well as paying dividends over that time.

Another useful insight comes from Professor Jeremy Siegel of Wharton. Early on in this crisis, Professor Siegel observed that the basis for valuing profitable companies at least in part is the price to earnings ratio (P/E ratio) of a given company and that the “E” stands for earnings expected for a given year. Thus, a company selling at a P/E ratio of 20 entails investors multiplying 20 years of expected earnings to come up with a value. Siegel pointed out that should a company’s annual earnings be wiped out for an entire year because of the pandemic, and would then bounce back, then the P/E ratio of a company should decline to, say, 19 times earnings, which would warrant just a 5% decline in a company’s stock price. Even a two-year wipeout of earnings would bring a P/E ratio down to 18, for a 10% decline. At the recent low in March, stocks declined by 35% and are still down almost 20% today.

The point is not to in any way to minimize the enormous impact that COVID-19 has had on society as a whole and the business and investment world. For everyone alive on the planet, this truly is a time like no other and special precautions must be taken in many areas of our lives, including in our investment approach.
But timeless insights about investing and creating wealth do not go out the window because we are now living in perilous times. Uncertainty about the ultimate resolution of the pandemic, likely by some combination of vaccine or treatment, and social distancing and other preventative measures permanently adopted by society, is not a prescription to abandon investing in the best combination of businesses we can find that will get to the other side of this crisis and resume their profitable future path, because of the enduring values in their brands, know-how and assets.

Investing is at its most powerful when you can identify undervalued companies that can grow their businesses (sometimes by disrupting the existing business world) well into the future in a way underappreciated by the investment community, which is often buffeted by short-term noise and temporary disruptions. COVID-19 is obviously more than noise and probably longer than temporary, but life will return to what will likely be a “new normal.” Unfortunately, some businesses do not have the resources to survive unscathed by the COVID-19 crisis. Other businesses will be fundamentally transformed. Some will take advantage of the changing social landscape and grow stronger. The great thing about being an investor at this time, especially one with the resources and cash to take advantage of the changes, is you can tailor your portfolio to meet the times, except of course for those investors wedded only to investing in pre-set indices like the S&P 500, which up to now has been a decent proxy for stocks as a whole, but now contains a host of companies that will be severely challenged by changing circumstances. The question is why buy an index of stocks that undoubtedly contains many that simply are not built for this unique period. The answer is that you do not have to. Index investing may no longer be the safe or prudent thing to do for investors with meaningful assets and a chance to diversify among industries not facing difficult longer term challenges.

Arrival Capital continues its search for undervalued investments that can be placed in diversified client portfolios that can stand the test of even the most trying times. What’s more, we try to know the person or people behind every portfolio to see where they are in their own lives and let those circumstances help dictate the types of investments and overall risk that is appropriate. We continue to be the eyes and ears for our clients in the financial world, investing for the long term but knowing as well the short-term pitfalls and tensions we all confront in today’s challenging world. Stay well!

2020 Investment Preview — Seeing Clearly

Posted by on January 24, 2020

In the lead up to 2020, a timely New Year’s resolution would have been to try to see things more clearly in the new year, as in 20/20 vision, which is defined as “normal visual acuity (the clarity or sharpness of vision) measured at a distance of 20 feet. If you have 20/20 vision, you can see clearly at 20 feet what should normally be seen at that distance. If you have 20/100 vision, it means that you must be as close as 20 feet to see what a person with normal vision can see at 100 feet.” But 20/20 vision does not mean perfect vision only “the sharpness or clarity of vision at a distance.” In the investing world, many seek the ability to see what is ahead in the distance. After all, who would not want to be able to know what stocks will go up (or down) the most in the year ahead. But people are usually kidding themselves if they really think they or anybody else has such unique foresight. Often people project what has happened in the past and convince themselves they know what is going to happen in the future. Or perhaps investors hear a prominent person in the media give their own forecast of the future and then figure they too are in on the secret of what the future holds. No, in investing, as in other fields, trying to “see” the future is a fool’s errand.

But just because investors can’t “see” the future doesn’t mean we can’t try to prepare for it. First, we can strive to know the present as well as we can. We can also seek to understand the range of possibilities that are likely to come about in the near to medium time frame. In quantitative terms, we can assign future probabilities based on current facts and historical patterns. In terms of famous sports sayings, we can, as Wayne Gretzky once remarked, “skate to where the puck is going not to where it has been.” The past and present are often the best guide to what the future might hold in regards to business and product trends, financial conditions and policy changes. But we also know there is a lot we do not know about the year to come. Who will win the election? What international events might roil business plans?

When Arrival Capital manages the hard-earned and critical capital of its clients, we always start with what we know — about product trends, financial conditions, asset values, and, perhaps most importantly, about our clients.

What are their financial needs, goals and challenges? Investing is always a mix of the world at large and the intimately personal. Only when we know our clients can we place their financial and investing needs in the larger context of where their wealth should be placed in an evolving economy, with growing and declining businesses, fluctuating inflation and interest rates, all amid an uncertain political environment. Another thing we can know about the future is that facing it with a diversified portfolio of investments with compelling intrinsic value is a better way to proceed rather than with a thoughtlessly aggressive mix of similar stocks that everyone seems to be piling into, even in supposedly safe index funds. Diversification also beats a fearful portfolio comprised of cash and fixed income earning next to nothing.

The final way to “see” clearly, in 2020 or any year, is to understand the underlying mood in the market, whether in relation to the market as a whole, a particular industry or in an individual stock. “Mood” might seem like kind of a squishy term, but when viewed in the context of behavioral economics and contrarian investment theory, we can undoubtedly point to the chronic over and under reaction to market news, and periods marked by doom and gloom on one end, and euphoria on the other. On Christmas Eve 2018, with the stock market down almost 20% from its highs, you could feel the doom washing over the investment world and the media that cover it. Yet the numbers coming in did not seem so outlandishly bad. Nor was it unreasonable to expect that the Federal Reserve would reverse course and cut rather than increase short-term interest rates, thus removing one of the principal reasons stocks were headed lower in the first place. Know the present! For investors that kept their cool, analyzed what was happening and made their best guess as to what was likely to happen, they were able to set up for an exceptionally good 2019. Employing the same tools for 2020, and trying to see clearly, Arrival Capital will keep clients on the right path to a future of increased wealth and financial security.

2019 Fall Update — A World of Promise and Uncertainty

Posted by on September 26, 2019

Summer gives way to fall. In those first few days of September, we often feel a pang of regret that the restful flow of August is ending, with Labor Day as a hard and fast border with busier times. But, if you are like me, it amazes how fast we get used to September’s quickening pace. School begins for the kids, football season starts up (with the usual New York Jets stressful disappointment). The business and cultural worlds rev up with new products, services and offerings. As investors, we are also thrown into a whirlwind of economic, political and business news. September is historically the worst month for stocks, even as this past August was also weak. But, as always, a prudent, value-based investor must take account of short-term trends and news flow only as a jumping off point for renewed longer-term analysis of business trends and company-specific potential. Wealth is created by understanding current prices and comparing them to an informed opinion of potential future value.

Looking at anything long term is always challenging for all of us, hardwired as we are for immediate satisfaction and avoiding imminent pain. These all too human behavioral biases are today compounded by the constant drumbeat of a news cycle created to hook, captivate and retain us day after day. This is not to say the news of the day, including political news, is not important to take into account as investors and citizens. But we can’t forget that these “content creators” get paid, one way or another, on clicks, page views and subscriptions. Objective fact gathering and curation is not necessarily the end product anymore. Therefore, investors, in particular, should not let screaming headlines unduly influence your long-term views. There is more uncertainty now over more things than seems usual, but there is undoubtedly incredible promise in the products, services and innovation to come in the near and distant future.

What are some long term views and observations that have worked in recent years? Obviously, the large internet and technology names, such as Apple, Amazon, Google and Facebook, have grown revenue and profits. as they have changed the world. But there are also the financial tech companies, like PayPal, Visa and Square, that have also profited as they have revolutionized the way we shop and pay for things. In the non-tech world, companies like Boeing, Lockheed Martin and United Technologies have changed the world of defense and transportation. In the realm of retail, businesses like Starbucks, Nike, Home Depot and VF Corporation have proven the resilience of well-run brands and unique distribution systems even in the age of Amazon. Even in the relatively mundane world of utilities, companies such as NextEra, American Tower and American Water Works have grown exponentially from the efficient delivery of, respectively, basic energy, cellular service and water.

Though all the above companies have done extremely well for investors over a period of years and even decades, none of them have gone up in a straight line. There are always roadblocks, whether it is threatened regulations, changing trends or tragic accidents. it is the job of the investor to analyze the obstacles faced by businesses from time to time and thoughtfully judge whether the good times, the increasingly profitable times, are coming to an end and act accordingly. These are never easy decisions, either with companies with which you have expanded your wealth over years, or with new potential investments that are cheap because of current obstacles or fears. Today, those potentially profitable long- term holdings may be in healthcare, the cloud, or basic industrial companies that need a new burst of global growth that looks somewhere past the horizon.

Again and again, year after year, it is uncertainty and promise that the investor must balance in the quest for financial security and independence. At Arrival Capital Management, we are here to help you strike that balance.

A Journey Worth the Turbulence — Q2 2019 Investment Update

Posted by on April 12, 2019

It seems less and less people really enjoying flying. Most of us fly because we want to get somewhere worth going. To get to these places we endure the lines, security checks, cramped seats and, often, turbulence. Personally, I hate turbulence, the ups and downs, the bumps and shaking of the jet fuselage. It’s not that I think the plane is going down but the gyrations do shake me up a little and cause me to become a bit anxious. The feeling has gotten more pronounced as I’ve gotten older. But have I given up flying? Not at all.

The sentiments above are completely true but also, if you didn’t catch on yet, a good analogy to investing for the long term as we do at Arrival Capital Management. The intended destination of investing is financial security and independence, as well as achieving discrete investment goals. Think of this ideal financial destination as Hawaii. To get to Hawaii you have to endure a fairly long flight that may be marked by long periods of boredom punctuated with sharp periods of turbulence, shaking you up and down and from side to side. Still up for the trip? What if I told you that the safety record was excellent and sooner or later you would get to your desired destination, even with the ups and downs?

By using a disciplined, repeatable, value-oriented approach, Arrival Capital believes it is possible to get to your financial destination, wherever that might be. There will be some bumps along the way. Financial theory, though not perfect, does a good job of explaining why endurance of risk and (especially downward) volatility is basically the price investors pay for achieving returns greater than cash in the bank. In 2017, the S&P 500 index was up around 20%. In 2018, the index lost more than 6%, and was down 20% in the 4th quarter from its high. So far in 2019, the S&P is up 15%. Not a smooth ride, to be sure, but certainly a profitable one as the S&P 500 is now up almost 30% from December 31st, 2016.

Clients may reasonably ask, “can’t you get me to a good financial outcome with less volatility?” The answer is that we can try by using the tools and mindset of value-based investing to look for opportunities with large upside and limited downside because of the price paid relative to future earnings power and/or the value of current assets. In practice, effective value investing can moderate the downside somewhat while producing meaningful levels of wealth creation. Arrival Capital clients did better than last year’s 6% slide in the stock market, some with positive returns for the year. But that down 20% 4th quarter swoon was just too fast and steep to completely sidestep. The only way not to feel that volatility would have been to have markedly less (or no) stocks in a portfolio. In that case, you would have felt better on December 24th, but what about now? To get back to our flying analogy, it is stock investing that provides the fuel to get to Hawaii, and no matter how hard we try, a portfolio with very little exposure to the stock market just won’t get there in any reasonable amount of time if at all.

April 2019 finds the S&P 500 just 1% off its all-time high. Fueled by a patient Federal Reserve on interest rates, strong employment levels and the possibility of a trade deal, stocks have bounced strongly from December lows. Investors that sold stocks in December now must be regretting their decision and are likely buying stocks now. This sell low, buy higher rhythm is unfortunately endemic to our psychological make-up with our fear of loss and uncertainty. We just don’t like turbulence. But with the right amount of self-awareness and a disciplined, value-focused approach to building our investment portfolio, we can maximize the chance to safely arrive at our investment destination, achieve our financial goals, and provide security for ourselves and our families. Arrival Capital is happy to help you in that journey. Enjoy the Spring.

Jay Rosenberg, Principal, Arrival Capital Management LLC,

Tumultuous Times — Q1 2019 Investment Update

Posted by on January 15, 2019

Winter in New York has definitely descended upon us this week, with bone chilling temperatures under crisp blue skies forcing New Yorkers to crouch into the wind; hats, scarfs, and bulky winter jackets offering only a little relief from the cold. It can be tempting to think ahead (or back) six months to the warmth of July when the sun shines till after eight and the balmy outside air invites us for a long stroll or run. But we can’t and shouldn’t wish away the next six months. As I recently reminded my daughter, each day should mean something, even if it isn’t summer vacation, or a beautiful Spring afternoon. Make the winter days count, learn something new, study, experience life.

It is kind of the same with the stock market and financial markets in general. Things are now stressful and volatile. The easy markets of mid-2018, when stocks seemed to rise every week, with little angst, are long gone, with an unclear return date. Many market favorites and the biggest holdings of the stock index funds have lost 20% and more of their value. During turbulent times, it can be tempting to get into a financial crouch and pull the proverbial covers over our heads, raising and staying in cash. Instead, I would advise investors to wade into markets such as these to find the long-term opportunities that have been created by short term fear and anxiety.

As of Christmas Eve 2018, stocks were down 20%, Winter, in the form of a Bear Market, had arrived. Of course, there is nothing magical about 20% down. In 2008-09, stocks declined more than 50% from all-time highs.
But a market down 20% undoubtedly has opportunities that a market at all-time highs did not. Worries abound – about trade, political impasse, an aging business cycle, debt – but business goes on. Certain companies may be just hitting their stride while others might be on the verge of a turnaround. Technological advances, demographics and other factors can create winning investments in the right businesses with good managements, brands and know-how. But to find these investments, you need to pull off the covers, put aside the anxiety caused by an imperfect world, and do the work.

At Arrival Capital Management, the goal is to provide clients with active, value-based investment management. We get to know our clients, their risk tolerance and financial needs, but then we match that to the investment world as we find it, not as we wish it would be. For that same reason, we eschew stock index funds, because simply piling on the averages and the biggest stocks cannot be a substitute for seeing where the world and business is going as opposed to only where it has been. In times such as these, it is important to engage on a daily basis even with scary markets, because that is often the best time to find the investments that make the most sense going forward and provide financial security for the future. Summer and better markets will eventually return, but it is in these difficult times that it pays to plant the seeds of long-term value with opportunistic investments today. At Arrival Capital, we are here to help. Stay warm.

Jay Rosenberg, Principal, Arrival Capital Management LLC

Arrival Capital 2018 3rd Quarter Update — A Scary October

Posted by on October 31, 2018

A sudden, October storm engulfed US stock markets, sending indices down around 10% but doing even more damage to recent high-flyers like Amazon and Netflix.  It should not have been a complete surprise given trade disputes, political tensions, and rising interest rates.  In the lead up to the downturn, it made sense to slowly build cash levels, delay putting new cash to work into stocks, sell off financially challenged companies, and, in general, do a checkup on personal risk tolerance in the event of a stock sell-off.  In truth, however, even if you did all these things, as we at Arrival Capital tried to do for our clients, a sharp financial reversal can test even the hardiest investor’s mettle.  As Mike Tyson once said, “everyone has a plan until they get punched in the mouth.”

Now that such a punch has been delivered, what next?  To start, take a breath.  Go over on paper or just in your head your cash needs over the next six months.  Is all that cash somewhere safe and accessible?  What about big ticket purchases?  Are all of those far enough on the horizon that it still makes sense to count on 7-8% a year stock market returns over the long term to help fund those plans?  As long as the answers to these key threshold questions are “yes”, then the next phase is to systematically review your stock market exposure.  Simply stated, that means looking at your biggest positions and re-assessing their intrinsic worth over time vs. their current market value.  If the intrinsic value is less than even the reduced market value, then it is probably time to move on from the investment.  Next look at overall portfolio weightings.  No position should account for more than 5-10% of your overall portfolio.  Nothing is certain, after all.  But before selling consider tax implications.  Depending upon tax bracket and where the positions are held, selling a big winner can mean an immediate tax haircut of 20% or more of the cash raised.  Then look at your industry weightings.  Too much tech or healthcare, for example,  so that your net worth is too closely linked to fluctuations in these industries should also be adjusted.  Finally, after all these exercises are satisfied, and you have enough cash and portfolio balance, then it is time to be opportunistic;  because we know that some individual companies will continue to prosper and create value that ultimately will be recognized by the market as a whole.  As investors, the time during and after market sell-offs is the right time to seek opportunities in undervalued companies that have been sold off indiscriminately to the point that current and future value is there for the taking for opportunistic investors with the time and patience to see things through.

Volatile markets can make for rash decisions.  We all remember 2008-09 and the financial panic, when stocks lost 40% of their value.  The re-build from that, in confidence and net worth, took years.  Only in hindsight does the decision to stay invested look easy or smart.  But what is smart is the search for value.  What makes sense is to have exposure to the best managed companies, the most innovative businesses, and the most promising technologies.  Stock market sell-offs, corrections, and even prolonged bear markets are what gives investors access to these investment opportunities at prices that do make sense over time.  Our best investments are not when stock prices are at their highest levels, when everyone is in, but instead come when fear is high and prices are cheap.  At Arrival Capital, we spend much of our time researching and monitoring potential investments that can create wealth for our clients as part of a personalized portfolio.  Often it comes down to then being able to buy these companies at the right price.  If you can find enough promising investments and buy them at the right price, then you have gone a long way to ensuring a prosperous financial future, even if it that means sometimes having to endure the type of uncomfortable sell-off we are going through now.

Happy Halloween!

2018 Mid-Summer Investment Update — No Doldrums This Year

Posted by on July 16, 2018

After fifteen years of managing money professionally, I can safely say that I love my job.  One fulfilling part is working with people to understand their financial needs and goals and coming up with a financial plan and portfolio of holdings that gives them the best chance of achieving those goals.  Another exciting part of the job is everyday getting a chance to try to understand what is going on in the world, (not just the investment world, but the whole world), and seeing, first, if any events affect the plans and holdings of clients and, second, digging into whether any recent events, decisions or circumstances provide opportunities to add potential investments to client portfolios in a way that presents a good chance to generate long term wealth with an acceptable level of risk.  Of course, finding ways to generate wealth for clients is always helpful to enable clients to meet their financial objectives.  By the same token, understanding a given day’s events also helps to know when it might be time to re-evaluate particular client holdings.  The point is not to be a day trader but to get up every day to learn new things about the world — business, politics, science — and then use that knowledge to manage client wealth, over time, by being in the right investments, businesses and industries and avoiding those places where risking capital is just not worth the likely rewards.

Managing money is not just following current events, however, it is also understanding why markets and the people (or machines) trading in those markets are making certain buy or sell decisions about investments in relation to events and why these decisions, on a market wide scale, often reflect unwarranted over or under reaction.  This is the “chess” to the “checkers” of just following the news.  In an age of short-term trading, machine trading based on algorithms, and huge amounts of money sloshing around financial markets at any given time, it is the ability to know when markets occasionally and briefly “get it wrong” that can add value to investment portfolios by allowing an investor to add investments of great long term potential value when they are “on sale”.

This important ability to find investments representing good value is not just about understanding markets but also involves understanding ourselves; specifically, why people make financial decisions and why those decisions are often wrong.  This comes out of the discipline of behavioral economics and one need not be an expert in it to use its principles to understand why people’s behavioral glitches, sometimes playing out on a market-wide or even global scale, can, if you can control your own behavioral follies, provide the opportunities to generate wealth over and above general economic growth.  Sometimes these glitches involve herd-like selling of an unpopular stock that is in the news, other times it is failing to see a dramatic change that a company makes to the status quo of an industry.  If an investor can be aware of the news and the behavioral biases reflected in reaction to the news, there is opportunity to build meaningful wealth over time, even in well-known and already omnipresent industries and companies.

The news flow of 2018 has been fast and furious.  That doesn’t mean that great investment opportunities arise every day, but you certainly need to be present every day in the investment arena — searching, listening, evaluating — to find tomorrow’s great wealth-creating investments.  If you cannot be there yourself, or choose other things to do with your time, then Arrival Capital can help do that for you; burrowing deep into the news of the day, and the trends and developments of the weeks, months and years, to find those investments that can lead to the creation of wealth as part of a carefully constructed individualized investment portfolio.  After fifteen years, there is never a dull moment, even during the summer.  Enjoy yours!






Q2 2018 Investment Update — The Forest Through the Trees

Posted by on April 20, 2018

In his latest Chairman’s letter for Berkshire Hathaway, Warren Buffett lays out his rationale for owning stocks, “Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly…In America, equity investors have the wind at their back.”

I include this quote as a reminder as to what our own goals and expectations should be in regards to investing. Of course, Buffett makes it sound simple. But what experience shows, however, is that investing is simple, or at least should be simpler than we often make it. It is not too much of a stretch to say that, when it comes to investing, it is the keeping it simple that is hard.

Trying to find successful businesses to invest in is what Arrival Capital does for its clients every day. This process is often a mix of the qualitative and quantitative. What products are generating buzz? What products and services are other business leaders using to help their businesses run better? What are my kids doing in their spare time? How is technology changing which businesses are likely to be more or less profitable in the future? Having business names to investigate is only the beginning of the exercise, however, next comes the key determination of the right price to be paid and how this price (the intrinsic value) compares to the market (stock) price at a given point in time.

This entire process must be undertaken amidst the swirl and constant noise of geo-political events, natural disasters, even presidential tweets. Media outlets get unduly optimistic and then just as pessimistic about industries, countries, and sometimes life in general. That is when Buffett’s advice comes in handy. Look at the longer term, keep focusing on businesses and what they do to earn profits, tune out the noise. At Arrival Capital we think of it as not losing the forest (successful investing) through the trees (short term issues and moods). And it isn’t always easy!

Even today, in the midst of a general market pullback, there are a myriad of worries — rising interest rates, slow sales of the iPhone X, trade disputes, and Washington DC dramatics to name a few. All of these may matter in the next week, some will matter in the next few months, but not many will meaningfully impact a given business’ profitability and shareholder return if the business, itself, is managed well and has a collection of know-how, assets and/or brands that are intrinsically valuable and hard to replicate.  So even as we try to see the forest, we also seek to know the trees, that is being aware of short term issues that may be driving the market price of good businesses down and, occasionally, may actually drive down the intrinsic value of a business.

The last part of the investing equation for Arrival Capital is, after finding promising businesses, to craft and manage a client portfolio made up of a diverse set of businesses that can protect and grow wealth given the uncertainty inherent in today’s economy.  But through it all, we, and all investors, should keep Buffett’s long term optimism about America in mind.

Enjoy the Springtime!

Q1 2018 Investment Update — Fast Start for the New Year but…..

Posted by on January 30, 2018

One benefit of waiting almost a month into a new year to write an investment outlook is that it should give you a slight edge in actually being accurate.  But so far January 2018 has been like much of 2017 for the stock market — higher, albeit with a bit more urgency and volatility.  We still are left wondering in what ways 2018 will be different.  What sectors will differentiate themselves as being good values going forward, what companies will present good investment opportunities because of characteristics unique to those particular businesses, regardless of the overall state of the stock market?  The biggest question on most investors’ minds, however, is will the market continue to go up, month after month, resulting in another stellar, and, often, life-changing, year in the way of investment returns and wealth generation or is it “too late” to make further investments without the risk of suffering deep losses?

In the last couple of days, we may finally have a new factor to consider — the rise of interest rates in the US, and its effect on the economy and the stock market.  Of course, the rise in rates has been forecast for months, even years.  But the fact that it finally appears to be here and at a suddenly quickening pace has our attention.  Investors now must examine the stock market through the prism of higher rates.  The effect in the bond market is clear — rising rates will cause bond prices to fall.  But as to stocks, the outcome is far less certain.  If rising rates are caused by a growing and strong worldwide economy than profits should still be on the rise, with stock prices staying stable or increasing, except perhaps for higher yielding stocks such as utilities or consumer staples.  But if rising rates cause stress in the system, as the system itself tries to normalize after years of central bank bond purchases, then stock investors need to re-run their analysis of the stock market as a whole and judge the effect of rising rates on specific companies and industries, in particular.

At a recent value investing conference at Columbia Business School, some of the best investment professionals in the field were likewise cautious about overall market levels but still convinced that the goal of a good investor is to constantly search for investment opportunities that can create wealth over time, regardless of the ups and downs of the stock market as a whole.  This is not merely the usual self-serving talk of professionals in any field, but represents what value investing should be — searching for undervalued investment opportunities.  We as investors take the economic environment as it is but then look to capitalize on market currents and short-term focus that lead to companies and sometimes entire industries being undervalued.  In the end, the key insight of the value investor is that true value comes out in the end.  Conference participants also noted that value investing stands in contrast to the marketing driven necessities of the mutual fund and ETF industry, which really seeks to mimic averages like the S&P 500, piling people into the most expensive stocks without regard to valuation, all with a promise to deliver, at best, mediocre results less fees.

See the investing forest through the trees, but know the trees inside and out as well, we like to say.  A high stock market level and rising interest rate environment, as well as a dose of political turmoil, are some of the “trees” we need to be conscious of today.  But as investors, particularly individual investors, we have a financial rhythm to our lives that is often independent of short term market gyrations.  Are we saving for college for kids or grandchildren?  When and how will we retire, or buy that second home, or afford long term care of an aging parent or ourselves?  These financial questions and markers should be answered on a personalized basis.  But the main takeaway is that we as individuals and families will need wealth.  We need to store it in a safe way, depending upon our needs and risk tolerance, but we also need to create more wealth, year upon year, if possible, but certainly over the long term.  If we can accumulate wealth faster than the investment market as a whole, so much the better, as our purchasing power will increase relative to other consumers, whatever the level of inflation or interest rates.  This, in turn, should increase our financial well-being and independence.

Value investing is the approach that can work best to accomplish our basic objectives as investors.  It looks for investment opportunities based on a business’ intrinsic value, which itself is a function of cash generating ability and ownership of increasingly more valuable assets.  Value investing seeks to increase net worth while at the same time tries to limit risk by purchasing investments that are already cheap, and thus less likely to go down as much as overall markets in a general market downturn.  Finally, value investing allows for creation of overall investment portfolios that can be targeted to an individual investor’s own financial risk profile and financial circumstances, mixing in cash and fixed income, where needed, but with a fundamental view towards owning assets that are best positioned to appreciate in the years ahead.

Using core value investing principles, Arrival Capital Management is better equipped than ever to help investors build toward a better future.   Don’t settle for impersonal solutions and mediocrity of results. Stay warm and healthy this winter!




Autumn 2017 Investment Update — Why We Invest

Posted by on October 25, 2017

After market downturns it is often important not to let fear of further declines cause investors to sell down their positions at what might be at or near market lows.  The harmful effect of such panic selling is often exacerbated by then having to pay capital gains taxes on long held positions.  Yet another harmful effect of selling after a scary dive in financial markets is that the money generated is then held in cash, probably earning little in the way of returns for the indefinite period before an investor regains confidence in investing and finds suitable investments.

At market highs as we have today, the question becomes should investors do the opposite of the above advice?  That is, in a market making new highs, should investors sell off pricey stocks, raise cash, and wait for a better entry point?  Our answer at Arrival Capital is mostly “no” but a little bit “yes.”  Let us take a deeper dive.

Investing is a serious endeavor meant to increase wealth and thus purchasing power for an individual, family or institution over the long term.  It is not a sport or a game, or a means of keeping score.  Therefore, as investors, we want to at a minimum have our wealth and purchasing power at least keep up with economy as a whole, including inflation and, if at all possible, have investment returns that exceed the growth of the economy, as measured by inflation-adjusted Gross Domestic Product (GDP), or, if we get really ambitious, a large cap stock index, such as the S&P 500 index.  The reason we want to exceed these returns is because over the longer term we and our families will be competing with others to purchase the types of goods and services that are necessary for maintaining and improving upon our quality of life.  What now might seem affordable for a family, for example a year of college, could in fifteen, twenty or thirty years no longer be affordable if our purchasing power does not keep pace with the costs that figure, in this case, into tuition.  The same holds true for other big ticket items like a house, or long term elder care.  As a an example, back in 1985, the annual tuition for an Ivy League college was approximately $9,000.  Last year, that tuition was over $45,000.  Tuition increased at a rate of about 5.3% a year.  To the extent your total wealth increased by less than this amount (including the portion of your salary you saved), you were falling behind each year in your ability to afford tuition for your family’s next generation.  On the other hand, the return of the S&P 500 index averaged 8.3% a year.  Thus, even with a five-fold increase in tuition over thirty-plus years, if you or another family member (fostering inter-generational family wealth generation is another important topic) had taken that $9,000 back in 1985 and put it in the S&P 500 index, not only could you pay for college today, but you actually would have money left over for other spending priorities, and this after a period of time that included the 1987 market crash, the 2000 tech stock implosion and the Great Recession of 2008-09, when stocks lost more than 40% of their value.

This spending power analysis is a long way of answering our initial question — no, one should not engage in market timing and sell off stocks just because we are at market highs.  The goal is to outpace inflation and GDP growth.  A soaring stock market is at least in part reflecting a strong economy and healthy GDP growth.  Investors need to equal or exceed this growth to keep pace.  There is no edge to this type of market timing, the result will probably just be losing ground to the economy as a whole.

What about those who wish to exceed market averages?  Can’t we cut back exposure to stocks at record highs and then add back a little bit lower?  Again, we would urge caution to such an approach.  Rather, we would focus on the individual stocks and investments owned by an investor not the market as a whole.  This is where our value investing approach comes in and we come up with the little bit “yes” response to the question of what to do at market highs.  Value investing is meant to increase the odds that our downside is more limited than the market as a whole while our upside is at least as promising.  This has two benefits:  (1) even if the market falls, say after an unexpected event or a rapid economic decline, a value-based portfolio should decline less than the market (and GDP), furthering our goal of staying ahead of the economy, even as it falls on an absolute basis; and (2) value investing analysis will constantly look to add investments that remain relatively cheap to a portfolio while removing those whose value is now deemed to be far less than the current, inflated market price (taking into account taxes that come due when a long held investment winner is sold).  This value investing mindset, combined with an individual risk assessment focused on risk tolerance and current income needs, thus leads to a built-in and ever present response to a record breaking stock market and hopefully avoids the attendant acrophobia that many investors apparently are feeling right about now.

An old investing adage is cut your losers and let your winners run.  On first blush, that sounds like a recipe for momentum investing.  But it is really a recognition that certain businesses can achieve such a level of market dominance, positioning and scale that they will continue to grow revenue and profits, and thus become ever more valuable as investments.  Such may be the case for some of today’s tech giants, with only the threat of government intervention as a future potential value killer.  That means stock price increases alone should not cause an investor to get ready to sell.  Don’t throw away a business with good value just because it’s stock price has gone up!  At the same time, there have been ample opportunities over the past few years to pick up good value that remains after investors have thrown away stocks in a myriad of industries, including financials, industrials and media.  Today, if one treads carefully, there continue to be opportunities in beaten down sectors like retail, restaurants and energy, as well as the constant generation of opportunities from spin-offs, special situations and, occasionally, a new business or product that is slow to have its value recognized.

Combining the great companies that will get better, with the good ones becoming great, and the sick but cheap businesses becoming healthier, there is a recipe for portfolio construction that can stand the test of market highs and lows and, over time, lead to the type of wealth maintenance and generation that will truly lead to a better life for ourselves and our families.  Let Arrival Capital help you do this today.  Enjoy the Autumn!