Nearly eleven months into 2015 the Dow Jones Industrial Average is unchanged for the year and the S&P 500 index is barely positive. Does that mean all the ups and downs, the emotional swings caused by August's abrupt market correction (a more than 10% decline) and autumn's swift recovery were all meaningless? Not exactly. The volatility, the hand wringing, the apparent global pessimism, are all part of a process of pricing in expectations as well as justifying the historical outperformance of stocks over the long term. The volatility of August and September is the price we pay for long term positive returns that beat inflation. For a value investor such as Arrival Capital, moreover, the extreme pessimism that accompanies stock market declines creates the opportunities that can lead to long term outperformance with a lower level of risk.
Over the past few months, general market downturns have combined with certain industry-specific overreactions to create particularly intriguing opportunities. For example, a summer warning by Disney (DIS) about ESPN cable subscriptions led to a huge sell-off in major media stocks. Some of the these stocks have invaluable media franchises as well as production and distribution assets that represent terrific long term value at the right price. In healthcare, and particularly pharmaceuticals, a couple of high profile drug company missteps cast a pall over the entire industry that may provide attractive entry points for long term investors.
Of course, value investing is not always easy. Energy, for example, is an industry facing hard times and low prices. But is it really time to step up for a long term investment? The jury is still out but we continue to believe there may be a place for energy pipeline and infrastructure businesses in many investors' portfolios.
The upshot of all this is that even if 2015's returns may not rank in comparison with the stand out returns of the past few years, the summer sell-off of 2015 and general market malaise throughout the year presented value investors with a chance to accumulate positions in investments promising a chance at strong returns and yet have the requisite margin of safety all value investors should seek. Finding good companies at great prices or great companies at good prices, value investors can use years like 2015 to set up a portfolio for years of strong returns with hopefully a lower level of risk than the market as a whole. That really is the name of the game in a nutshell.
Finally, as we head into the week of Thanksgiving, let us take a moment to be thankful for those in our lives, whether family or friends, clients or co-workers, that provide the joy and purpose to our lives, as well the humor and camaraderie. Have a happy and healthy Thanksgiving.