To Our Business Partners

VOLATILITY

After a relatively long period of calm, stock market volatility has returned.  Stock prices have gone back to displaying wider daily price swings.  This can be unnerving to investors, particularly when they’ve become accustomed to relatively calm markets for an extended period.  Some investors tend to react unfavorably to these gyrations, as emotions can run high during these periods.  Often this can be counterproductive, producing unnecessary trading costs and causing damage to long-term investment goals.

In our opinion, the best way to counteract the impulse to react to short-term price swings and the emotions they generate is to have some idea of what your holdings are worth.  Calculate conservative estimates of today’s value (“present value”) of the cash your companies produce over the next several years.  This provides an economic reference point from which to make rational and thoughtful buy and sell decisions.  

After rigorous study of fundamental characteristics – a company’s business, profitability, financial soundness, growth prospects, and management – the critical final decision-making criterion is relating the current stock quote to the current appraised value, incorporating a large margin of safety.  The safety margin, remember, is the difference between price and value.   

During periods of stress in the marketplace, knowing what your stocks are worth helps you make better decisions.  While there will sometimes be mistakes due to miscalculation or worse than average luck, this appraisal process usually takes much of the emotion out when markets are highly volatile.  We have no control over Mr. Market’s schizophrenic behavior, but we always have total control of the investment process and valuation.

The alternative is letting the markets control the process and how you react.  When you don’t have a good idea what your stocks are worth you become subject to whatever emotion is present at the time and the whims of the markets.  This will surely not produce satisfactory results over time.  Volatility often creates opportunities, but you must be ready for it.  To paraphrase Buffett:  be fearful (sell!) when others are greedy, and greedy (buy!) when others are fearful.

PORTFOLIO VALUATION 

Stock prices are generally high and fully valued, while bargains are scarce.  The price-to-value ratio of our group* is an historically high 96%.  It feels like one should be more “fearful.”

RECENT RESULTS

Market indexes in July were mixed, with a significant change in what had become the norm for the last several years.  Small cap stocks came to life, producing gains of over 10% for the month, while large cap indexes languished.  The tech-heavy S&P 500 was up only 1%, while the even more tech-heavy NASDAQ Composite declined almost 1%.  Year to date, better results continue to be skewed toward large cap and technology stocks, but by a smaller margin, with the S&P 500 and the NASDAQ Composite up 16-17%.  By comparison, small/midcap indexes have gains of 10-12%.  Over the last twelve months, the large cap indexes continued to dominate, up 22-23%, while the smaller company indexes are up “only” 13-14%.  Over the past year, the capitalization-weighted S&P leads the equal weighted index by almost 10%.  Lack of broad participation in the fun by most stocks continues to be a concern.  Our group* of portfolio stocks compare favorably to most of the indexes over the periods discussed.  

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.