One benefit of waiting almost a month into a new year to write an investment outlook is that it should give you a slight edge in actually being accurate. But so far January 2018 has been like much of 2017 for the stock market -- higher, albeit with a bit more urgency and volatility. We still are left wondering in what ways 2018 will be different. What sectors will differentiate themselves as being good values going forward, what companies will present good investment opportunities because of characteristics unique to those particular businesses, regardless of the overall state of the stock market? The biggest question on most investors' minds, however, is will the market continue to go up, month after month, resulting in another stellar, and, often, life-changing, year in the way of investment returns and wealth generation or is it "too late" to make further investments without the risk of suffering deep losses?
In the last couple of days, we may finally have a new factor to consider -- the rise of interest rates in the US, and its effect on the economy and the stock market. Of course, the rise in rates has been forecast for months, even years. But the fact that it finally appears to be here and at a suddenly quickening pace has our attention. Investors now must examine the stock market through the prism of higher rates. The effect in the bond market is clear -- rising rates will cause bond prices to fall. But as to stocks, the outcome is far less certain. If rising rates are caused by a growing and strong worldwide economy than profits should still be on the rise, with stock prices staying stable or increasing, except perhaps for higher yielding stocks such as utilities or consumer staples. But if rising rates cause stress in the system, as the system itself tries to normalize after years of central bank bond purchases, then stock investors need to re-run their analysis of the stock market as a whole and judge the effect of rising rates on specific companies and industries, in particular.
At a recent value investing conference at Columbia Business School, some of the best investment professionals in the field were likewise cautious about overall market levels but still convinced that the goal of a good investor is to constantly search for investment opportunities that can create wealth over time, regardless of the ups and downs of the stock market as a whole. This is not merely the usual self-serving talk of professionals in any field, but represents what value investing should be -- searching for undervalued investment opportunities. We as investors take the economic environment as it is but then look to capitalize on market currents and short-term focus that lead to companies and sometimes entire industries being undervalued. In the end, the key insight of the value investor is that true value comes out in the end. Conference participants also noted that value investing stands in contrast to the marketing driven necessities of the mutual fund and ETF industry, which really seeks to mimic averages like the S&P 500, piling people into the most expensive stocks without regard to valuation, all with a promise to deliver, at best, mediocre results less fees.
See the investing forest through the trees, but know the trees inside and out as well, we like to say. A high stock market level and rising interest rate environment, as well as a dose of political turmoil, are some of the "trees" we need to be conscious of today. But as investors, particularly individual investors, we have a financial rhythm to our lives that is often independent of short term market gyrations. Are we saving for college for kids or grandchildren? When and how will we retire, or buy that second home, or afford long term care of an aging parent or ourselves? These financial questions and markers should be answered on a personalized basis. But the main takeaway is that we as individuals and families will need wealth. We need to store it in a safe way, depending upon our needs and risk tolerance, but we also need to create more wealth, year upon year, if possible, but certainly over the long term. If we can accumulate wealth faster than the investment market as a whole, so much the better, as our purchasing power will increase relative to other consumers, whatever the level of inflation or interest rates. This, in turn, should increase our financial well-being and independence.
Value investing is the approach that can work best to accomplish our basic objectives as investors. It looks for investment opportunities based on a business' intrinsic value, which itself is a function of cash generating ability and ownership of increasingly more valuable assets. Value investing seeks to increase net worth while at the same time tries to limit risk by purchasing investments that are already cheap, and thus less likely to go down as much as overall markets in a general market downturn. Finally, value investing allows for creation of overall investment portfolios that can be targeted to an individual investor's own financial risk profile and financial circumstances, mixing in cash and fixed income, where needed, but with a fundamental view towards owning assets that are best positioned to appreciate in the years ahead.
Using core value investing principles, Arrival Capital Management is better equipped than ever to help investors build toward a better future. Don't settle for impersonal solutions and mediocrity of results. Stay warm and healthy this winter!