Well, with summer officially over, attention now turns to autumn, traditionally a time that sizzles with vigor and opportunity along with uncertainty and the sense of another year heading into the history books. Before looking ahead, however, one more look back at summer is warranted.
For Arrival Capital Management LLC, the summer of 2016 was a season of exciting changes. First, we moved offices to a beautiful commercial townhouse on New York's Upper East Side, at 94th Street and Lexington Avenue. We hope you will pay us a visit if your are ever in the neighborhood. Second, and more far reaching, Arrival Capital stepped up it's capacity to effectively serve clients with a new institutional relationship with TD Ameritrade (TDA). TDA will serve as our primary custodian for individual client accounts. This new relationship will give Arrival Capital more sophisticated analytical and practice management tools that will ensure your investment management is state of the art, yet will continue to be based on timeless concepts of value investing and contrarian analysis individually tailored to each client's investment needs and goals.
But enough about us. The summer was a time of low volatility and glacier-like but upward market movements. This came after a negative 2015 and a more than 10% drop to start off 2016, as well as another sharp drop on the day of the Brexit vote.. What turned the negativity around? The easy answer is the concept of TINA, standing for "there is no alternative" to US stocks, given global uncertainty and record low or even negative interest rates around the world. Even 1-2% growth is better than nothing, goes the thinking. There is certainly some truth to this school of thought. But markets are also fairly adept at pricing in future profit potential, and one can't help notice that through a cloud of negative market sentiment fanned by the so-called "smart money", market participants seem to be anticipating higher profits and a generally benign business environment in the near future. Skeptics might term this complacency, but we would would suggest that the country's problems and challenges are front and center, particularly in a fraught election year. But with unemployment fairly low, and energy and food prices continuing to stay down, it appears that the American consumer still has the wherewithal to sustain American businesses.
The great unanswered question continues to be whether American business will step up and resume investing in both people and productivity enhancements that will carry us forward in a more sustained way economically. Another wildcard is whether the rest of the industrialized world, whether Europe, China, Japan or Great Britain, can get the most of their own people and businesses. Obviously, these questions are still outstanding, as is the American presidential election. But the market is telling us, despite the uncertainty, that people continue to be productive and generate value, which investors can capitalize on by taking advantage of market disruptions and recurrent bouts of investor pessimism to snap up the most attractively priced, genuinely strong businesses out there in the world.
How to identify those companies? It is both art and science. Observing societal, cultural and business trends is vital. For example. knowing how today's young people consume media and entertainment (hint: YouTube and Xbox), or how people pay for things (Visa and PayPal). Understanding what is working in the world also means staying with companies even through temporarily tough times which are treated as permanent impairments by investors at large (see Apple and just about every drug and biotech company at times). Finding enduring strength sometimes means stepping up when people are running for the exits (see Chipotle and the major media companies like Fox and Disney).
The modes of thought required to find good investments at great values is varied but the underlying methodology is the same: buy value, buy underpriced cash flows or assets, buy low. Don't chase and don't panic.
Circling back to the year we've had so far, we don't want to sound the all clear or to dismiss those advising caution. The world is uncertain, times are unusual economically. Those sounding the alarm have some valid points. But the way we take into account the potential for somewhat bad outcomes or the so-called "tail" risk of a small chance of something really bad happening is to stick to value investing and hold cash. The percentage of cash depends on a number of individual variables, but in a low interest world, cash is the place to be as a complement to a well-diversified equity portfolio.
Autumn, despite the falling leaves, is a time of new beginnings, big and small. The right investment portfolio can undoubtedly make a difference in people's lives and help them discover new possibilities within themselves and for their families. Come stop by Arrival Capital or give us a call, and let's start planning a better future.
Have a great autumn.
