The December “Santa Rally” in the market came just in time for Christmas and then faded in the low volumes of the week between the holiday and the New Year. So far 2016 is looking like a dud. Saudi Arabia is not a big fan of Iran and North Korea is testing nuclear weapons. Those events don’t exactly coincide with positive New Year’s resolutions.
For several years now I have questioned the reverence with which we regard the dawning of a New Year. After all, every day is a new day, isn’t it? Every day starts a new twelve-month period. If one is out of shape in March, he really shouldn’t wait until January 1 to make a resolution. Alas, in the case of the changing of the calendar the old axiom holds true – it is what it is.
For better or worse people use January 1 as the time of the year to mark progress and start over. From an investment standpoint, the issue is that 12 months is too short of a time period to be meaningful. Investing is, by nature, a long-term endeavor. Language can be tricky here, because “long term” is in the eye of the beholder. To be clear, we define that term as one full market/economic cycle. A full cycle is one boom and one bust, a period of growth followed by a period of contraction. This is the natural course of things. We never grow forever nor do we shrink forever. There is a cycle which in total usually means growth – you know, three steps forward and two steps back. The problem is that most people constantly believe that what is happening now will just go on forever.
This morning in Atlanta it felt like 24 degrees outside with the wind chill factor, while it was over 70 degrees and humid on Christmas day. Yesterday I spoke with a friend in the clothing business who is overrun with sweaters because no one buys sweaters as gifts when it is 70 degrees outside. I laughed and asked, “They didn’t think it would ever get cold?” Evidently not.
Well, the weather is indeed going to change, count on it. The market environment will as well, and it really has nothing to do with what day it is on a calendar. If the New Year happens to be the time for reviewing your portfolio’s investment results, a prudent person would not look at the calendar year but instead would examine what has happened over the last five years, or since inception if the investment is newer.
This doesn’t mean set it and forget it. As I have said many times, long-term investing is a mindset, not a time frame. New information could come out tomorrow that would change one’s long-term view dramatically. This information just has nothing to do with short-term price movements. The prudent investor diligently follows what is actually happening at the companies in which he has invested. Is their business growing? Is management doing a good job? Are their balance sheets in order? These are the things that matter in the end. It doesn’t always look that way.
Geopolitical events can temporarily rock markets, but ultimately investment returns are a product of the price one paid for the future earnings of the companies in which she invested. Right now prices are good, especially when one looks beyond the top returners from last year that are selling at ridiculous prices. The vast majority of the time that means that over the next three to five years, returns will be good. What happens tomorrow we have no idea, but we aren’t investing for only one day or even one year.
2015 was a frustrating year for prudent investors. (You can read more about that soon in the next issue of The Quarterly Report). 2016 is off to a rough start. It could get rougher, but as sure as it was not going to stay 70 degrees all winter long in Atlanta, Georgia, it won’t stay like this in the market. This too shall pass and 2016 could prove to be a better year. After all, it’s a New Year and tomorrow is a New Day.
Chuck Osborne, CFA