Staying grounded as an investor is vital to long term success, and is as important when financial markets are making new highs as when crisis envelopes the economy. As we continue to experience a rapidly increasing market, it is helpful to consider what staying grounded actually means. Clearly, one aspect is to not get carried away with riskiness when risk is being so lavishly rewarded. Margin loans are a recipe for disaster, as is a kind of heedless momentum investing, consisting of buying what has gone up the most for no other reason than the hope that such stocks will continue to rise. There is also a tendency, which must be fought, to lose patience with investments such as bonds or real estate that may not be rising at all and are mathematically dragging down the overall performance of an investment portfolio. In many ways these are the lessons of the 2000 tech market crash, which left aggressive investors with huge paper losses from wealth levels they thought they had permanently attained.
What are the lessons of the 2009 Great Recession and aftermath? Certainly, there were the same problems of lack of diversification and a belief that, in this case, real estate and finance were on an unalterable path to higher levels, pulling overall financial markets higher at the same time. But what of the aftermath of 2008-09? In this regard we may be talking about long term fears that were generated rather than objective lessons. Fear of sudden losses, fear that the whole structure on which financial values are based may be fragile or even phony, fear that the game is "rigged" or based on nothing more than the interplay of greed vs. fear. The aftermath of 2009 generated these fears in many of us, exacerbating market turn downs in the years following 2009 as people shoot first and ask questions later regarding their stocks, or crowd the exits all a once at the slightest hint of distress, causing values to drop -- pick your favorite metaphor.
The market crash of 2008-09 remains a powerful phantom over current investors, residing in the pit of your stomach on bad days, and is the little voice warning it all could be a mirage on the days of record setting market averages. Therefore we have another element of staying grounded, which is to not to be overly fearful. That is not to say be pollyannaish. But the economy can be solid, sometimes for years at a time. Companies and businesses can be strong and get stronger and more valuable. Again it is helpful to remind ourselves that every day millions of people get up and go to work, creating value, performing services, inventing, solving problems and making human life, on any number of measures, better. This work creates the value that investors, often the workers themselves, can reap via dividends paid, and capital gains accrued. Investing is not a mirage when based on fundamental values like profits, revenue, asset value and the likelihood that such income can be generated for years into the future. So perhaps there is a simple way to think about it -- staying grounded as an investor means investing in things that are themselves grounded, whether stocks in successful, profitable companies, or real estate with proven income potential, or even bonds in which the debtor has ample money to pay interest and principal.
Today's markets are dominated by world beaters that have been in plain sight for years, whether Facebook (FB) or Alphabet (GOOG) on the internet, or Apple (AAPL) in technology, Netflix (NFLX) in entertainment,and Amazon (AMZN) in e-commerce. Until recently, many of these stocks could be bought for lower multiples than slower growth, less profitable companies. But there are many companies that have, in a quieter way, proven their dominance and excellence, making terrific long-term investments by those that made decisions grounded on fundamentals, not hype, and not irrational fear that great companies are built on sand. For example, Boeing (BA) in airplanes, Lockheed-Martin (LMT) in defense, Salesforce.com (CRM) in business software, Electronic Arts (EA) in gaming, Honeywell (HON) in industrials, and Digital Realty Trust (DLR) in real estate, to name just a few.
Arrival Capital continuously tries to build and shape client portfolios based on a grounded, value-based philosophy designed to understand which companies are poised to deliver sustainable financial performance in the years ahead. We look for investment opportunities sometimes generated by overall market weakness, sometimes company-specific but, in our view, transitory setbacks, sometimes newly emerging, less well-known companies poised to deliver long term value creation, and sometimes just recognizing that well-regarded companies are actually not well-regarded enough by a market as a whole more in thrall to short term concerns. Whatever the method of finding great investments, we can then shape them into a diversified, value-based portfolio that works for clients looking for long-term wealth creation but with a margin of safety that prudent investing, as opposed to emotion-based speculating, can provide.
If this type of investment management can be of help to anyone you know, please have them give us a call. In the meantime, have a terrific rest of the summer!
