October 11th marks our 7th anniversary since we started T&T Capital Management in 2011. We cannot express to you how thankful we are to each and every client for entrusting us with your hard-earned assets. Our mission has not changed one iota. We want to provide what we believe to be the best investment product/service out there, at a reasonable price to our clients. Through good times and bad times, you will never have to worry about us losing sight of our mission to enhance your financial futures or dealing with you honestly. We will not lose our nerve when others lose theirs. It is fitting that this anniversary is occurring as markets globally correct. While the U.S. market has been strong most of the year, globally, most markets are in corrections or bear markets. As value investors, we often find ourselves most attracted to the areas where others fear to tread. We are a long way away from anything I’d define as a major correction in the United States, but our set of opportunities improves with every down day.
“We cannot express to you how thankful we are to each and every client for entrusting us with your hard-earned assets.”
Volatility has returned to equity markets with 5 consecutive negative days, and with today being the most substantial selloff led by the Nasdaq dropping by 4%. Historically, we see selloffs of this size on a percentage-basis, about 3.5 times a year. Corrections are a normal and completely expected occurrence when investing. How one reacts to corrections is one of the biggest determinants of their future investment success. Panicking during a correction is akin financially to jumping out of a plane during turbulence. By simply not panicking or chasing during panics or euphorias, you are putting yourself ahead of the masses.
The list of those that have rode the bull waves and sold before the bear markets hit repeatedly is an empty one. The list for those that have panicked whenever trouble perks up only to get back in after prices have rallied is virtually endless. A week like this past one, or even a bear market doesn’t change our core strategy one bit. When we invest we are looking to maximize long-term, after-tax returns with the least levels of risk, with risk being defined as the permanent loss of capital. To accomplish this, we seek to buy securities at large discounts to intrinsic value and sell when they get closer to that intrinsic value. Ideally, we look for companies that are growing that intrinsic value by over 10% per annum, which only enhances their margin of safety due to the price we buy them at.
As the market has gotten more expensive, we have decreased our aggressiveness. We didn’t benefit as much as many of these tech stocks rallied, but we also don’t get hurt as much when they inevitably correct. Many companies in the tech sector are valued at levels that assume the most optimistic projections are the base-case. This optimistic thinking has almost always worked out poorly for those that buy in late to the party, and I’d be very surprised if that isn’t the case again this time.
Despite my overall pessimism as far as the market overall, I find myself excited by some of the individual securities we are finding, particularly after this selloff. Volatility spiking allows us to generate more premium when we sell put options on undervalued stocks. Almost all of the companies we have been buying offer incredibly low valuations, solid dividends, and are buying back stock cheaply. That generally has augured well for us when we have found that combination of factors.
“Despite my overall pessimism as far as the market overall, I find myself excited by some of the individual securities we are finding, particularly after this selloff.”
I believe there is a growing contingent of people that are thinking we are very close to a recession. While economic data is extraordinary, economies can change direction quickly and people generally don’t notice we are in a recession until one emerges. There is no doubt that rising interest rates can push an economy into recession, but predicting when has not been easy. Since our last recession was nearly a decade ago, we are overdue. With that said, I believe that the people that are betting that the next recession is imminent and that it will play out similarly to 2008, are likely to be wrong. I see bubbles in various areas of the equity market and the bond market.
The underlying economy is emerging from incredibly slow growth, to more explosive, albeit fueled in part by tax cuts and increasing deficits. We are not at the point of the market cycle where you should be ramping up risk and trying to hit a grand slam. Instead we want to be disciplined and thoughtful with every decision we make. A great aspect of our strategy is that we really only need a handful of ideas to be successful, and we believe that we have those ideas at the ready.
From 2000-2002, the Nasdaq dropped 80% from peak to trough. Even during that period of major market stress, value investors performed exceptionally well, generating explosive returns as value emerged from its period of underperformance in the 1990s. Just as was the case then, value has been in a depression versus growth stocks. Obviously, every value investor is different and fortunately we have done very well in that environment, but if the tides turn towards our direction we could be in a great position.
For those of you that have kept a little cash on the sideline, recent volatility might provide a good avenue to add funds. Many stocks are down 10-20% over the last few months. There is a huge list of really good companies like GM and American Airlines trading at 52-week lows. Between those opportunities and the attractive premiums from selling puts, we are starting to get more excited about the opportunity set. My advice is that if down days like today create anxiety, step away from following things as closely. Day to day prices on securities are totally irrelevant and this simple step will save you undue stress that only hurts you.
“My advice is that if down days like today create anxiety, step away from following things as closely.”
I believe the best is yet to come for your investment accounts and for T&T Capital Management as a whole. Each day, we become more knowledgeable investors and financial advisors and we all should benefit from that accordingly. We are not interested in being a jack of all trades. Instead we have built some great partnerships with insurance companies, tax planners, and real estate professionals. For any of your financial needs, don’t hesitate to contact us, and if we can’t help you directly, we at least should be able to point you in the right direction. I only recommend working with people that I’d work with myself.
As always, if you need anything at all, we are always available. Thank you once again as being on this journey with you all has been a tremendous pleasure and blessing. Hopefully we can continue for many years to come!