Market Insights

Investing Smartly in an Uncertain World -- Q2 2017 Investment Update

Resilient.  What else to call a US stock market that once again is making new highs?  Here at home, with political animosity seeming as high as it has ever been, the market moves higher, amid ongoing uncertainty over the future of healthcare, taxes, foreign policy, trade and many other pivotal questions we count on our political system to decide.  Over in Europe, there are similar clashes over nationalism, the EU, Brexit, and immigration, to name just a few of the issues plaguing one of our largest trading partners.  Yet markets the world over march higher, following and sometimes forecasting higher corporate earnings and GDP as well, domestically and overseas.  Interest rates remain low, as does inflation, and employment is at generally high levels, all suggesting an economy that is at least stable for the near future.  All this makes us wonder if all our political distress, as painful as it seems, may really be the classic "first world problem" we often use to describe things that are annoyances and nuisances of 2017 life in the West but not matters of life or death.  In fact, comparing our democratic system, with its rule of law, vibrant civil society, activist press, and strong free-market economy with the many places in the world gripped by civil war, famine, endemic corruption, or truly authoritarian rule, we can begin to see that our economic system truly is resilient, with businesses mostly free to prosper or perish based on market forces, and thousands if not millions of individual decisions made by consumers, workers and managers. Viewed this way, it is not surprising that our economy and thus the performance of our stock market can sometimes detach from the apparent ineffectiveness of our politics, at least for a time.

Investing smartly in an uncertain world therefore starts on an assumption of the resilience and dependability of our financial system and market economy, despite political and cultural turmoil. That leads to the first lesson for an investor -- do not be left behind by the economy as a whole.  Notice that doesn't mean never losing money. Sometimes markets and investments decline.  But for the most part economies grow, and investments in businesses that provide the goods and services for that growing economy will increase in value over time.  As Warren Buffet likes to say, never bet against the long term success of the American economy.  Investors, at the very least, need to participate in this growth, otherwise the cash under the proverbial mattress will lose steadily each year to the forces of inflation.  As we often remark to potential clients, the decision not to invest is just as much a decision as what stocks to buy.  For new investors or those with their first real levels of accumulated wealth, the starting point can be a collection of diversified index funds that will virtually guarantee some participation in the economic growth of the country.  But we believe that indexing is a start rather than an end to the investing process.  Average should not be the ultimate goal of investors with the means to personally or through a skilled practitioner understand market conditions and meld them with individual or family goals and financial needs to construct a portfolio that protects wealth while seeking to grow it through creation and management of a personalized, diversified investment portfolio using fundamental principles of value investing.

We are often asked how a boutique money management firm can compete in financial markets with huge hedge funds and algorithmic traders moving around giant sums of money.  But in our experience, these market participants, with their hair triggers and the waves of money they send sloshing around financial markets, create the mispricings that a disciplined, long term investor can use to his or her advantage.  A small earnings miss or minor business announcement, signifying little about the long term can cause a 5-10% decline  in the share prices of individual businesses or sometimes even entire industries, making a good potential investment into a great one, taking into account the reduced starting price.

On a more general level, being a value investor means taking advantage of a number of situations creating advantageous long term investment opportunities.  Among these are the market price (with its typical short term focus) under-appreciating how a somewhat dominant company can actually expand it dominance and thus profitability as economies of scale and the network effects of scale take place.  Also creating value can be one-off company disappointments that, in the opinion of an investor, but not the market as a whole, do not subtract fundamentally from the brand value or future profitability of an enterprise.  On an industry level, sometimes temporary barriers to profitability arise and are assumed to be long term, as with energy last year, and most of retail today. Again, short term fear being a friend to long term wealth creation.

Arrival Capital believes that disciplined, long term value investing tailored to individual financial circumstances can create meaningful long term wealth in a way that putting your entire net worth in a mix of index funds simply cannot match in terms of personal control and balancing of risk vs. reward.  We welcome the opportunity to serve the needs of investment clients for whom average is not good enough, either in the service they receive or the long term results they can expect.  Have a terrific Springtime!




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