Published On: May 18, 2022
Written by: Ben Atwater and Matt Malick
Mike Tyson famously said, “Everyone has a plan ’till they get punched in the mouth.” Well, thus far, 2022 has been a punch in the mouth to stock and bond investors.
When the market gets vicious and hits us, it is more important than ever to have a clear set of convictions. In our note today, we want to take time to review our core beliefs. This philosophy offers the best chance of staying on your feet, regaining your composure and winning.
We believe you cannot time the market. There are no shades of gray in this. We do not believe we can time the market even a little. It is our belief that everything we do, we need to do systematically and dispassionately.
We believe the most significant risk-reward decision in investing is the allocation to stocks versus bonds and that this simple determination overwhelmingly dictates portfolio volatility.
We do not invest our clients in stocks unless we conclude that an allocation to stocks is appropriate, given each client’s risk tolerance and time horizon. Our discussions of risk tolerance include both (1) financial ability to absorb short-term investment losses and (2) psychological ability to handle market fluctuations.
For client assets that are not suitable for the stock market, we invest in individual fixed income securities for safety of principal and a steady source of income.
We believe that finding the right asset allocation for a client is paramount. We believe that rebalancing this allocation is the best way to buy more risky assets when the market is down and to reduce exposure when the market is up. This is not market timing nor is it predicting, anticipating or interpreting economic, political or societal trends. Rather, it is taking advantage of market movements without our many inherent human biases.
We believe in stocks for the long run. Stocks have hundreds of years of history behind them. Stocks are pieces of ownership in companies that are striving every day to grow, adapt and innovate. We own a share of the earnings of these companies, and we collect their dividends. No matter the headlines, the forecasts, the rumors, etc. stocks have proven they will grow over extended periods of time consistent with their earnings and their dividend growth. All the “noise” in between only serves to trick us into buying and selling at inopportune times.
Benjamin Graham, the father of “value investing” and a mentor to Warren Buffett, once posed the following question: “Ask yourself: If there was no market for these shares, would I be willing to have an investment in this company on these terms?” If we genuinely believe in the long-term business prospects of a company that we own at a fair price, the day-to-day fluctuations of the company’s stock price should factor little in our investment decisions. The essence of investing is to know what you own and why you own it.
We consider the contrarian point of view in each investment decision that we make. When the stock market is gripped by fear and pessimism, we remain confident that stock prices will eventually reflect the long-term viability of the underlying companies. When the stock market experiences unjustified and excessive enthusiasm, we become cautious of overvalued stock prices. This does not mean that we try to anticipate what is going to happen, it means we always realize that neither good times nor tough times will last forever. In other words, this too shall pass.