Cautious But Wrong

Recently, Larry Kudlow asked about the performance of money managers who were consistently cautious last year. He also pointed out that they were dead wrong as the S&P 500 had gained over 30%. It is an important discussion largely because it can be so distracting. Some seers see the market going higher and some see a crash…how should you manage your money given the constant uncertainty? How do you set up your portfolio to give it the best chance of meeting your financial goals when you don’t know what will happen, especially in the near-term?

We are active managers who pick individual stocks based on their fundamental merits and our thorough quantitative analysis. We are always fully invested. Our holdings may grow more defensive or aggressive over time, but we hold stocks for an average of 5 years, so we do not market time.

Managing OPM (other people’s money) is a great responsibility. Anything other than a cautious approach strikes us as reckless. The Greek and Cypriot economic concerns at the beginning of 2013, the suggested taper of Fed purchases suggested by Mr. Bernanke in May, and the government shutdown in October were great reasons for caution. As fully invested managers, we remained in the market as we always do for the entire period. That the tide of share prices rose against a year of considerable concerns worked out well for our clients.

We have always thought that the reason amateur and professional investors so often tend towards certain and specific market proclamations and prophecies is due in inverse measure to the general and constant uncertainty which defines the business of investing. It is amusing to hear a young strategist predict the exact price of oil or Apple or interest rates by some date certain. It is also worrisome that some may listen and heed what is mistaken for advice. We also worry that the greater the volume, the greater the credibility.

No one has any idea what stocks or bonds will do in the next twelve months, and they never did. Understanding that the short-term markets are irrational and unpredictable is the key. It is reasonable only to invest based on things which are more constant: over long periods, corporate America has grown, and corporate America in general has increased in value. Owning some of the stronger parts of Corporate America for a long period has certainly been profitable in the past.

Ours is a buy-to-hold discipline, focused on paying a reasonable price for quality businesses with good balance sheets, above average Returns on Equity, a good sales and earnings track record, and strong prospects for future growth. We will build diversified portfolios, keep turnover low, keep capital gains low, and rebalance periodically.

I am an old-school, get-rich-slowly conservative, one who believes that capital preservation trumps speculation every time. Lower volatility is very important for many clients; especially during years like 2008 and 1Q 2009 when clients wanted to sell everything and to put the money under the mattress. Helping clients put together a plan for their money and then helping them stick with this plan can be enormously valuable. Emotion is the foe of every investor.Dogged research and dispassionate discipline win out.

So, caution doesn’t make one wrong. A constant awareness of one’s mortality strikes us as a pretty healthy attribute. Get comfortable with the uncertainty and emotion of investing and hold tight to your investment disciple with all the dispassion you can muster. Most important, if you need help, ask. Be careful out there!