Category: Quarterly Newsletters

Virtually every major athletic and business endeavor has been governed over long periods of time by a set of standards or morals. In basketball it helps to be tall, in baseball it helps to run fast and throw hard and in football it helps to be physically strong. In business it helps to have capital, sales, profits and free cash flow. We believe that the morality of common stock investing gets unhinged after an extended period of easy money and low interest rates.

In the famous book, Strange Case of Dr. Jekyll and Mr. Hyde, Dr. Jekyll and Mr. Hyde were one human being with a split personality. Dr. Jekyll healed people and Mr. Hyde murdered them. This economic environment and the U.S. stock market have the same kind of split personality. The economic environment has been healing people with jobs, consumer confidence and a bright demographic future. At the same time, in the second half of 2018, the Mr. Hyde stock market took investors out back to a slaughter, knocking a swift 18-20% off major indexes and punishing over-priced glam tech stocks even more.

Certain economic concepts have been a source of frustration to investors over the years. The movement of bond prices up or down to bring existing bonds in line with prevailing interest rates would be one example. We could be seeing declining bond prices over the next ten years when interest rates adjust higher as the economy strengthens. Our reasoning for this will be dissected later in this piece.

As a young stockbroker in the 1980’s, I was hungry for disciplines which could help me make money for clients. One of the most sensible things I came across was a theory by an investor that we refer to as the 70-20-10 rule. Human nature dictates an urge to make money in stocks quickly and for me that was proving to be difficult and problematic. Hence, the hunger to learn from theories like this rule.

Many a spring and summer outdoor celebration culminates in a tug of war. It is where an equal number of folks hold onto each end of a long rope and seek to pull the other side across the midpoint line. We believe a tug of war has existed in the US stock market over the last year between two forces which have been pretty equal in force while pulling in opposite directions.

The media and most major stock market strategists have been talking lately about beginnings and endings. The S&P 500 Index just celebrated the seventh anniversary of it taking off from its bear market lows on March 10, 2009. We enjoy watching many experts who didn’t participate in the more than tripling of the S&P 500 Index over those seven years comment and make dire predictions about the future. When it comes to negative nabobs, there must be some pretty good money in being the “boy who cried wolf” or the “blind squirrel that finds an occasional nut.”

One of the great investing books of the last 40 years was David Dreman’s, Contrarian Investment Strategy. He started it by telling of a hypothetical gaming casino with two separate, but adjoining, rooms: the red room and the green room. The red room was packed with people and excitement and almost every day someone hit a huge jackpot setting the building on fire with electricity. Every seat was packed, others waited their turn to play and the anticipation was palpable. Yet most of the players left the casino each night without their money, because the odds were stacked heavily in the house’s favor.

Someone recently asked a group of us which band we saw at our first rock concert. My answer was the Canadian band, The Guess Who, in 1975. With hits like “No Time,” “Undun” and “These Eyes,” The Guess Who hit the perfect balance between my 17-year old testosterone driven aggressiveness and my urge to romance the woman of my dreams. The key members of the band in the 1960’s and 1970’s were Burton Cummings and Randy Bachman.

Since our thinking is always dominated by owning businesses which meet our eight investment criteria in a long-duration time frame, we continue to remain vigilant of the circumstances around us. To that end, we thought it would be helpful to review a similar historical situation and glean a feel for what was wise behavior back then and what might be wise behavior as we look forward to the year 2014.