The past week has been traumatic, and it may not be done yet. Times like this are always frightening, and this one in particular is frustrating because this is a self-inflicted wound. However, this too shall pass.
One of the keys to a successful life is to keep one’s focus on what he or she can control. We cannot control what this administration does or the reaction of the masses that are wreaking havoc on the markets; We can control how we react, and in the long term, that will be the most important factor. It is precisely at times like this when prudent investing is so important. We say it all the time, but prudent investing is done from the bottom-up, it is absolute return-oriented, and it is risk-averse.
We invest from the bottom-up so that we know what we own. Stock prices may react in irrational ways because of macro issues like tariffs, but ultimately, they reflect the value of the actual companies. This new world order may cause temporary stress, but quality companies will figure it out and continue to do business and grow earnings. We will get through this.
We are absolute return-oriented, which means we invest in what actually makes sense and not simply what is popular. Over the last several years, many have questioned allocations to international stocks as well as to bonds because the S&P 500, driven by U.S. large technology firms, has been the dominate driver of results. Yet, international stocks are doing much better than U.S., and bonds have rallied to help mitigate the damage being done.
We are risk-averse. We have our risk control process for a reason: It keeps us from making emotional decisions at stressful times. The recent action has been severe, but it must also be kept in context. We are still above our risk thresholds, and we will take action if we deem it necessary and prudent to do so.
Finally, tariffs will be bad for our overall economy, but there will be winners. This is actually one of the problems with tariffs: the government gets into the business of picking winners and losers. We will talk more about that, but in the meantime, understand that opportunities are being created. Many proverbial babies are being thrown out with all this bath water, and those who keep their heads while others panic will be able to take advantage.
As always, if any of you are feeling too nervous, please let us know. We are here to guide you through this, and we will make it to the other side.
Warm regards,
Chuck Osborne, CFA
