October 2017 (click here for full commentary)
“It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.” W. O’Neil
In our reflection section we discussed the risk of anti-globalization and the potential impact of trade wars on the stock market. We have repeated many times the stock market can rise even in the face of negative news, this is often called “climbing a wall of worry”. At the moment, dismantling trade agreements is only a potential threat. We can ignore it, as the market has, but we should be aware of what the impact could be. For months I have read many reasons to justify a stock market collapse but what seems too high has gone higher.
The stock market has been able to continue to appreciate due to a combination of rising earnings and accommodative central bankers. Most companies have reported their earnings for the third quarter and most did not disappoint. The potential of further increases due to lower corporate taxes in the US has helped the market in October. From recent pronouncements of many key central bankers it appears that interest rates look likely to only have modest increases. Some quality stocks with defensive characteristics have been weak relative to growth companies. We still have a cautiously optimistic view of the market but are willing to hold on to stocks with solid dividends and the prospect of further dividend increases. We cannot accurately predict when the market highs will be considered too high.
September 2017 (click here for full commentary)
“If a business does well, the stock eventually follows.” W. Buffett
Many investors are exposed to advice the people offering it do not follow. Warren Buffett tells his followers to always be in the market while some of his biggest gains came from his large cash balances. Seems he does time the market but wants you to avoid this. He described derivatives as weapons of mass capital destruction, yet he made billions by taking options and warrants from companies to which he has lent money. Others advise you to only buy assets with the possibility to appreciate, yet they make lifestyle choices that let them spend on non-capital appreciating services such as Uber ride and international vacations. I do not like incurring debt but many successful investors use leverage in real estate purchases to grow their assets. In the end you must decide what investment strategy works for you and if you use one, your advisor.
The stock markets have ignored the risks of rising interest rates and international conflict. Maybe the stock market is looking at the fact earnings continue to rise and many companies have reduced the number of shares outstanding via share buybacks that will support further increases in Earnings Per Share. As the quote above states, if earnings keep rising the stock price will eventually follow. We like to invest in companies with the prospect of earnings and dividend growth. We do not look for the fastest growing companies as we worry more about what can go wrong than what if everything is perfect. Our style is more conservative and can lag in market rallies but preserve our clients’ capital in market declines. We do not bet against the market but seek steady performers.