2018 Q3 Newsletter
The Market Timer’s Dilemma
Bolstered by the passage of the Tax Cuts and Jobs Act in the waning weeks of 2017, the S&P 500 surged to a new record high of 2,873 on January 26. However, investors’ euphoria proved to be short-lived as tensions with North Korea, forecasts of slower GDP growth, and the prospects of additional rate hikes sparked not just one, but two 10% corrections during the first quarter. Predictably, scores of unguided, undisciplined, short-term, performance-driven lemmings reacted by selling almost $24 billion worth of equity mutual funds/ETFs during the first week of February, and then actually doubled down by liquidating another $21 billion worth after a barely recognizable 5% dip in June.
I am not making this up. After watching equities more than quadruple from the lows of the Great Recession nine years ago, the bulk of the investing public threw themselves into a full-blown panic in response to a handful of meaningless market hiccups. One can only surmise that those who sold did so with the intention of getting back into equities at some point after things “settle down.” As such, these Market Timers undoubtedly have spent much of the past six months agonizing over their TVs, computers, and phones in search of signals indicating if/when/how to get back in.
In stark contrast, having already Planned Wisely, Diversified Broadly, and Invested Intelligently, we DEM Spartans confidently Ignored the Noise. We knew that while we focused on the people, places, and activities that give our lives meaning, the very smart people who manage the Great Companies we own inside our portfolios were focused on making intelligent decisions about the products and services their customers, clients, and guests purchase. While we traveled, the leadership at Apple finalized details of the rollout and distribution of its newest iPhone X series. While we spent time with our children, executives at CVS moved forward with plans to expand into health insurance by acquiring Aetna. And while we slept, management at Chipotle expanded its menu to include tacos, avocado tostadas, and Mexican chocolate milkshakes.
Apparently, our confidence was well-placed because by the end of June, the S&P 500 companies had grown for the 38th consecutive quarter, posted record earnings, paid record dividends, and provided guidance that the third quarter would be even better. Meanwhile, the S&P 500 index only recently eclipsed January’s levels, meaning that although the prices of the companies we own are now slightly higher than they were back in January, their underlying value has skyrocketed.
Which brings us back to the dilemma of the poor Market Timer. As is always the case after committing the Original Sin of Investing (“Thou shalt not panic”), he is now forced to choose between (1) admitting his mistake and repurchasing equities at a premium to his exit price, or (2) praying for an even more severe correction to the price of an even more valuable asset and more importantly, the courage to act in direct opposition to his preferred behavior of just a few months ago.
As my Green Bay Packer defensive coordinator Fritz Shurmur used to tell us while watching film of Barry Sanders, “Good luck with that.”
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise