On the afternoon of February 11th, less than two months ago, major stock market averages were down more than 10% to start off the year, one of the worst performances to begin a year in decades. This awful start followed a negative year for most stock markets in 2015. What was driving the negative performance and pessimistic mood? A litany of concerns including declining growth in China, a rapidly falling price of oil, fears of a slowdown in the US economy and a general sense of fear and malaise that the world economy was teetering on the edge of recession or worse. With all this, then, the best response was to ... start buying hand over fist! Yes, navigating stock markets are never truly easy, but understanding human emotion, and specifically that age old battle between fear and greed, can continue to map an approach for the astute investor at even the darkest of times.
The declining price of oil was perhaps the single biggest factor driving stock market declines. Down from a price in 2014 of $100 to the mid $20's this past February, oil's scary decline brought down with it the price of other commodities as well as the entire high yield bond market. This despite the fact that declining energy prices gave US consumers more money to spend on other items (except for those whose jobs depended on energy). But throughout 2016 up to February 11th, oil kept going down, dragging stocks with it. But, as we remarked at the time, oil is not going to $0, they won't pay people to fill up at the gas station. That meant that at some point oil prices would stabilize and with it, so would the price of stocks. As with everything in this 24/7, hyper-connected world, this final bottoming process took place in a matter of days, followed by a move up in stocks to basically where they started the year.
So what was the proper response in those dark days of early February? It is surely 20-20 hindsight to say you should have bought everything in sight. But perhaps the better lesson is not to ever get too negative or too positive. Instead, let the numbers of particular companies and investments drive your analysis. What were sales and earnings looking like? What trends, multi-year and industry specific, would take precedence over the temporary ups and downs of energy prices? What companies' stock prices were being driven down with the market as a whole even as those companies had prospects and opportunities that merited rising prices not falling ones? Yes, an investor needed to keep an eye on China, oil prices, the Euro, interest rates and a host other factors. But these were the proverbial trees and an investor's job remains to see the trees but never lose sight of the forest. And what is the forest? Simply stated it is value. Analyzing what investments are intrinsically worth, based on profits, assets, intellectual property, and future prospects, all examined against a realistic appraisal of the overall economic situation as it is in the present and likely to be in the near future. This may produce a range -- if there is a recession, company A may be worth x, if an economic boom, it may be worth 3x, but in the most likely economic scenario, it will be worth 2x. And if the company is already selling at x, then the clear response is to buy the stock no matter how gloomy media commentators and prognosticators are in their assessments.
Investing remains about process and detail, but it is also about constantly searching for value, being opportunistic and, sometimes, blocking out the raw emotion of the times from investment decision making. Arrival Capital takes this approach to investing client funds, and augments the discovery of value-based, wealth generating investments with the hard work of ensuring each client has a diversified portfolio that can survive difficult economic climates yet also profit handsomely when the economy provides a beneficial tail wind or at least is neutral to the process of specific investment values being unlocked. If you or a friend, acquaintance or loved one can benefit from this type of personalized, value-based approach to investing and wealth management, please give us a call anytime. In any event, have a terrific Springtime!
