“Investing When Money Markets Moves Our Way”
The last several years, and even the last several months, have been a microcosm of the money markets. The 7% drop in the month of May set off by one of Trump’s tweets was followed by an almost immediately 7% upswing in the month of June and continuing into early July. In the year 2018, we had two different 20% downturns, each of which were promptly followed by strong market upturns. As most of our clients know, and have come to accept, this level of market fluctuation is normal but unpleasant. Our strategy to deal with these market fluctuations is to acknowledge that they will continue to occur, but it is the price that we must pay for the higher equity market returns that we receive and expect to receive in the future. That the new market records would be a good time to address a couple of changes in the markets. First, I have finally decided that it’s time that for me to get on Twitter. Our president has decided that he’s going to, generally speaking, bypass the normal press release mechanism and release new information to the public through Twitter. I understand that Twitter is used for all kinds of purposes other than general policy announcements. It also seems to be used for sparring with your enemies, and it’s certainly being used to communicate directly with the US citizens and bypass the Washington Press Corps. I don’t want to spend too much time on the technical details of our work for you, but I can’t help but notice that the equity market mutual fund ETF purchases by the general public has been running at very low levels with bond fund purchases outrunning them throughout the month of June. That is, most of your fellow investors were selling stocks and buying bonds during the June period when the market was setting market records, unfortunately we cannot help them because they’re not our clients, but it is an indicator to us how many people are poor investors.
It has been and continues to be our recommendation to you that you maintain your investment in these wonderful multi-national rational companies in which you have invested. The value of these companies may fluctuate dramatically in the stock market. Your fellow investors may sell out at the latest whim or presidential tweet, but you know and we agree with you, that all of these changes and the daily press fixations on one matter or another all pass very quickly and it becomes insignificant to the long-term health of these rationally run companies. This is a wonderful time for you to point out to your family that market ups and downs change very quickly, change unpredictably, but that we believe the long-term trend is up and that the 20% up and down turns, the 7% up and down months, are part of the cost of being a good long-term investor. Please note that during all of last year with its ups and downs and this year with its ups and downs, the dividends in your account have continued to come into your account and to rise. If you come across any of your good friends or family who are complaining about and concerned about market fluctuation, market volatility, please give them our name and we would be happy to talk to them and see if we can help them.
A final point that I would like to address, because I hear it come up from time to time are various market strategies that fall into the category of technical analysis, sometimes the “trend following,” sometimes they’re called market momentum play. All of them are designed to offer an investor the possibility of avoiding large market downturns and yet participate in the upside of markets. Many times, their components will argue for loss protection analysis or plan to protect capital. We believe that all these technical analysis type programs sound great, a program which avoids serious market downturns. But unfortunately, we can’t, because they don’t work.
The market technical analysis for rules-based investing is designed to help you stay invested in investment programs that are working well now and avoiding programs that are not working well. The idea being that the recent past can indicate and predict what the future will be. Our argument is that the future is unknowable, and that we have faith that capitalism will, and the investment markets moving cycles, will fix any problems that they’ve had in the past, any excesses that they’ve had in the past. We will move forward, solve our problems, and figure out a way to increase earnings going forward.
The market analysts offer you the possibility and pretend that they have a system whereby they can avoid these losses. It sounds very enticing because it’s exactly what you would like to hear, that losses can be avoided, and gains realized. This is not possible, so our strategy to deal with market downturns is for you and your spouse to fully acknowledge that they’re coming, to embrace them, to treat them as part of the entire process, and then to teach your children the exact same formula, so that they don’t make the mistake of getting involved in any one of these market time schemes that promise to have you out of the markets and selling before a downturn, and yet somehow magically getting you back into the markets in time for an upturn.
The last two years are just further evidence and a career’s worth of evidence, that these programs don’t work. That they have you sell to late, have you buy back into an investment program too late as well, so that you realize a lot of the loss don’t get the gain get the market gets her upturn, and are disappointed anew with significant transition cost all along. Our approach to dealing with market downturns is to understand that they’re coming. This is not a prediction for the future, but we understand that they will come. They will come at an unpredictable, unknowable time, that it’s part of the process. Both you and your spouse should understand that. You should explain it to your children so that they can become effective investors as well.
If you, your spouse, or any family members have any questions, please give us a call. We continue to be optimistic about the future. Your prosperity is our business. Thank you. Contact me with any questions.
Very truly yours,
James Vaughan III