This year’s “Insights” remind me of a joke one of my uncles used to love to tell about a three-year-old boy who had never spoken a word. His parents were very concerned and had taken him to multiple specialists to find out what was wrong and how it could be fixed. The doctors were stumped, all the tests came back normal, but still the boy didn’t speak. Then one day his mom was serving him breakfast and accidently burned his toast. The boy suddenly exclaimed, “Woman, you burnt my toast!”
The mother, ignoring the rude and disrespectful message, was overcome with joy. “You can speak! Why haven’t you spoken before?” The boy explained, “This is the first time anything has gone wrong.”
I sort of feel like that boy. I keep wanting to find something to share with all of you that is actually worth sharing, and the market just keeps moving right on upward. We keep making new record highs and all is good in the world (at least in the investment world). We have spent the last few days here at Iron Capital going through client statements (which will go in the mail shortly), and the recurring theme is that they all look great. The last twelve months have been one continual market rally. So, everyone is happy.
What a difference a year makes. This time last year we had gone through a long stretch of time where the market was not cooperating: markets were up on a headline basis, but that was really misleading as the only thing that was doing well were some very large U.S. -based technology companies. Every other area of the investing universe was bad. We had started 2016 with even those tech darlings – the “FANG” stocks of Facebook, Amazon, Netflix, and Google – going down and it looked as if we could go into a bear market. One year ago our messages were much different.
We were reminding people to be patient. I remember one client meeting in particular in which I was told that the market will never return to an 8 percent return goal. I explained to that client what I always explain: the market does not go up in a straight line. We have to take the good with the bad and understand the long-term average is what counts. I was never completely convinced that my message got through, but that client is still a client. “Patience; this too shall pass” is not an easy message to hear when one’s portfolio has been flat for several years and she is relying on that portfolio to fund retirement. But, that was the message a year ago.
Sure enough, it did pass. The rally we still enjoy started in the third quarter of 2016. It paused during October and resumed after the election. Once again things have shifted more toward the FANG stocks and away from some of the areas that rebounded so far the second half of last year, but the rally continues. International stocks have participated for the first time in years. Small company stocks have done well. Diversification has worked and our clients have been rewarded.
So, what really has there been to say? Just this: Patience is in order. Stay the course. This too shall pass. You all know by now that we fundamentally do not believe it is possible to time a market. That is a fool’s errand in our opinion. However, we know this rally will pass, just as we knew the stagnant market that preceded it would pass. We did not know that it would happen in the 3rd quarter of last year, and please make no mistake we are not predicting that this rally will end in the 3rd quarter of this year. For what forecasts are worth – which is not much in our opinion – we are still optimistic. That said, the market still does not go up in a straight line.
Emotions are the enemy of most investors. Many refer to the emotions of fear and greed as driving the market. While we believe that is over-simplified and many emotions are involved in investing, this framework does provide a helpful message. A year ago we were saying don’t be fearful, while today it is just as important to not be greedy. Stay calm and keep making prudent decisions.
Chuck Osborne, CFA