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,