Today’s market piece will be a bit of a mashup of the two topics. I’ve spent the better part of a week considering what topic I would like to write about today. Topics considered were interest rates, inflation, earnings, jobs data, market behavior in an election year, etc. I decided that all of those topics focused on the part of investing that is completely out of our control. In investing there are things we can control (individual time horizon, risk tolerance, overall portfolio construction for example), and things we cannot control (interest rate hikes, foreign conflict, unemployment numbers, etc.). I wanted to focus more on the controllable side of investing. What I mean is that when it comes to picking a company to add or subtract within the portfolio we don’t focus on what might happen in “the market” in the short term. There are plenty of investment managers that base the majority of their investment decisions on this data and where they think the market is headed. Most of that is an educated guess at best and it makes investing a game of speculation.
Here at Platte River Private Wealth, we don’t like speculating with people’s life savings, so investment decisions simply can’t be made based on guesses no matter how sophisticated the system or detailed the data. We prefer to make investment decisions based on factors that we can understand. To put it more simply, we like to buy good companies that produce a high quality good or service and is well managed from a financial perspective. If we execute this philosophy, then we don’t worry about the specific company (stock) when the market is down, and we don’t consider selling when the market is up. Our buy/sell discipline is a product of whether or not we feel the company is still making a great product and the price of the stock reflects the value that the company provides.
Let me give you an example: we hold Apple stock in many of our portfolios and have for some time. We base that decision on the fact that Apple makes a great product. I am willing to bet 75% of you are using your iPhone or iPad to read this article. At the very least your phone is within arms-reach (maybe in your pocket). While you are reading this article you will probably receive a text, phone call, or an update from one of your Apps. After you finish reading the article, your phone will be one of the three items you make sure you have with you when the leave the house next to your wallet and keys. You also might be wearing an iWatch which tracks your heartbeat, steps, and alerts you when your friend sends you a text. When your iPhone gets too old you will go to your local AT&T or Verizon store and pay a large sum for a new one. Even if you are one of those people that won’t buy a new one when it’s time (cue my partner Brock) you are paying the Apple ecosystem on a monthly basis for renewals on your favorite premium apps and can automatically make in-App purchases with the click of the button.
Let’s be clear, this article is not a recommendation to buy Apple, it’s an example of how we begin to consider purchasing a stock for our portfolios. Much more detail goes into the process that is very boring (balance sheets, dividends, P/E ratios, etc.) and is crucial in making a quality investment decision. I illustrate these things because most individual investors don’t take the time to remind themselves that they are not buying “the market” or “a stock” but are buying ownership of a business. In this case, Apple is a business that makes phones (and much more) and if you hold shares of Apple stock you own part of the business. When the market is as volatile as it has been the last couple of months, many investors forget the fundamentals of what they own or worse, they never really understood what they owned and why they owned it. If you don’t understand what you own, then any type of market volatility will cause nervousness, stress, and flat-out panic. Those emotions cause investors to question their decisions and then we are faced with bad investor behavior.
The chart below explains this behavior:
This type of behavior is all too common for the do-it-yourself investor. Our goal is to arm our clients with information so that they can have confidence in their portfolio regardless of the current market conditions. If you are invested in any of our portfolios that hold individual stocks you will notice that we stack the portfolio with US based companies that are household names. It’s not that there aren’t great opportunities out there internationally, it’s not that we don’t like lesser-known companies (they are in there too) but we believe there is a high correlation between client confidence and good client behavior.
In a down market recognizing the names of the companies you own encourages investor confidence. If you shop on Amazon often and see the stock on your statement you are more likely to ignore the swings in the price during a time of volatility. If you drink Coca-Cola and enjoy Starbucks, you are able to remind yourself that they both make delicious beverages even if the price of the stock is down in a given month. That perspective will drive better investor behavior. Good investor behavior tends to drive better individual investor experiences when it comes to return.
When I finish writing this piece, I plan to grab my iPhone and log on to my Amazon account. I’m shopping for a new Yeti travel mug. I’ll pay for that with my American Express Card that gets me travel points I can trade in for miles on Southwest Airlines for my next family vacation. If I was to happen to get a notification on my phone that the S&P 500 is down 1% on the day, I will remind myself that all the companies I mentioned above are in my IRA (which happens to be our all-stock growth portfolio). They are not “the market” and nothing has changed for any of those companies as a result. That gives me the confidence to ignore the notification and focus on what color Yeti I should buy.
Until next time.