Happy New Year to you all and we are optimistic about a bright 2019 and beyond. I wanted to step away for a moment from commenting on the market and instead engage with you on a broader level about what we hope to accomplish as a firm in the service that we provide for clients.
Our number one objective is to give you and your family a better financial future, and we are 100% focused on that goal. In my childhood I saw the impact of what deteriorating finances can have on relationships, people, and health. Our goal in starting T&T Capital Management was to offer what we believe to be the best long-term investment strategy to people at a reasonable price. We seek out opportunities wherever we can find the best risk-adjusted return potential. This means that we will invest in stocks, bonds, real estate etc., and then we also utilize our options strategies.
The main reason that so many people struggle with their investments is either a lack of attention, lack of investment knowledge, or a lack of emotional control. I believe that we can provide solutions to these issues, positioning you and your family for a greater financial future. Honesty and integrity are what must define us as an organization, and in our relationships with you. We will always be willing to give up profits as a business, if not doing so means sacrificing one bit of our moral values and being. No amount of money is worth breaking that trust, so we have and continue to promise you that we will never introduce products or services that we don’t believe to be in your best interests. That might not seem like a big deal, but anyone that has ever worked in finance, or paid attention to what happened during the Financial Crisis, knows that there is no shortage of people that will go to any lengths to make a dollar, and fraud and dishonesty are certainly not obstacles for them.
The first step to a successful investing journey is to get started. Many people are paralyzed by their fear and so they are almost always too conservatively positioned. One of my close friend’s father has a paranoia about stocks because his own father had lost everything trading based on technical analysis decades ago. Despite an inflation-adjusted average annual income of roughly $400K, his father is not in a position to retire although he is now 70 years old. While that salary may seem incredibly high, most people also ramp up their spending along with their earnings. While my friend’s Dad has saved a decent amount of money, he has made costly decisions such as maintaining two houses without renting one out. The biggest mistake though is that he didn’t invest his money into equities. Leaving the majority of your liquid net worth in cash or CDs will simply destroy your ability to substantially grow your wealth via investing. The decision to avoid equities has cost my friend’s Dad over $5MM in lost investment gains based on my rough estimates.
While not investing at all is rather extreme, lack of attention can also mean too heavy of a concentration in cash or fixed income. It is important to differentiate between money that you will need in the next year or two, and money that you will need further out into the future. It makes a ton of sense to have at least 1-year of expenses in cash if you believe that you could potentially lose your job or something similar. It doesn’t make sense for a 40-year old to have 40% of their portfolio in bonds in the low interest rate environment that has existed over the last few years, yet this is a “rule of thumb” for many financial firms. Paying attention to your overall asset allocation and thinking logically about the outcomes that you are working for is essential.
In 2019, we are pleased to be able to provide an updated financial planning tool and service that can help you create a comprehensive financial plan incorporating all of your assets, liabilities, and objectives. I encourage you to take advantage of this and allow us to help you create a working financial plan that allows you to see through short-term market movements, and instead focus on obtaining the important outcomes that you and your family need. The process takes some time and effort as we must compile the information from you, but it can be extremely valuable to have. It allows us as an advisor to assist on a far more holistic basis, where we can provide valuable insights on your overall financial strategy, including debt management etc.
One doesn’t need to be an investment expert, to have a great investment experience and reach their goals. The key is having an understanding of the investment strategy, which should instill confidence to get through hard times and stick with a plan. At TTCM, we put a unique and major emphasis on education and communication with our clients. This might seem superfluous to some of you being that it is us that are doing the actual portfolio management investing, so you don’t need to know a lot of the minutiae to reap the benefits. However, we have found through our experience in the industry that clients that understand why they are invested a certain way and the logic behind those decisions are the clients that won’t panic due to inevitable selloffs, and we are ecstatic that so many of you take the opportunity to add to your accounts when stocks are on sale instead of running for the hills, as many do at other firms.
One of my big criticisms about most funds is that they are too large to really understand what you own. How can you realistically keep tabs on 500 companies? By holding 15-20 positions, we are able to really know the ins and outs of the companies that we are invested in. That allows us to react quickly to opportunities when the prices change materially relative to intrinsic value. It also helps us understand the risks to watch out for that can destroy an investment.
Investment and financial knowledge go far beyond just understanding businesses. We need to know when it makes more sense to have a mortgage than to not have one. Should we buy or lease that car? When should we start our social security benefits? Can we really afford a private school for our kids? Is buying this larger house appropriate for our financial condition, or will it be the source of our future misery? Those are the types of decisions that we all make each year, but so rarely do we actually do the cost/benefit analysis. Please use us as we truly want to help you and your interests are our interests.
Market participants have learned the hard way in the 4th quarter that markets can go down too. Despite indices being up strongly through the first three quarters of 2018, nearly all markets experienced annual losses and we entered into a global bear market. Ultimately, stocks and the U.S. economy are built to go up and grow long-term. America is blessed with an amazing culture and work ethic. Stocks reflect corporate valuations over the long-term; as the economy grows our businesses grow with it. Most people understand this. If I were to take a poll if stocks were to be higher 10 years from now, I’d bet about 90-95% of reasonably knowledgeable participants would say yes. However, market participants have pulled record amounts of money out of stocks and funds over the last few months, precisely when stocks have gone on sale.
Nearly always this is driven by fear and panic. I’ve never seen an instance in my career where an investor has benefitted five years later by panicking. Usually, if they had just been able to hold off on liquidating their positions by 3-6 months, their portfolios would have been considerably higher. I’ve seen people get out early and benefit from stocks going lower over the short-term, but they have always missed out on the biggest parts of the ensuing recovery. Conversely, even if people invested right before a major downturn, they almost always can recover those losses if they are patient and using a longer-term value strategy.
Christmas Eve was a pretty miserable day for the equity markets, followed by the biggest one-day point gain ever on the 26th. If one panicked and sold out on the 24th they missed out on the best day in years for the market. In 2011, we saw a downturn similar in size and scope to the current one, and the next few years brought some of the best returns. Emotional control doesn’t mean never selling stocks. It means have a plan to generate outcomes and stick to that plan, as long as a thorough analysis of the facts tells you that is the right thing to do. Humans make terrible decisions when they are panicked. This is built into our DNA; if our ancient hunter and gatherer ancestors heard a noise they thought could be a dangerous predator they better run, and run fast at that, to stay alive.
Investing is a complex and longer-term endeavor. Stock prices change far more rapidly than the underlying businesses do, and the fact that prices are always publicly available leads to highly irrational behavior. When fear is pervasive the opportunities are far more attractive to make a lot of money. Stocks overreact all of the time to both good and bad news, so being able to stay unemotional and balanced allows one to take advantage of these mistakes. If you struggle with staying unemotional, reduce how often you look at your portfolio values and cut out financial TV news from your life. Trust me, it will help you and it will not cost you in terms of your investment success or happiness.
In conclusion, we are very excited about the future. I believe the current investment environment and opportunity-set is the best since January of 2016 and I actually think it is quite a bit better than that one. I have no clue if stocks will head 10-15% lower in the short-term, but I am very confident that 3-5 years from now, our portfolios should be materially higher barring a major war.
Most stocks we own are over 50% below our 3-5-year target prices for them, which is the largest amount since 2011. If you are contributing to a 401K or IRA and have the ability to increase your contributions, do so. If you have that extra $5K or $500K sitting around, take advantage of great companies being on sale. If you don’t have a comprehensive financial
plan, let’s create one together. We can recommend experts in insurance, estate planning, mortgages, real estate etc., that we know and trust. Help us help you create the best financial future for you and your families. Understand that my family and me are 100% invested in the same securities and strategies that we are for clients. We feel the same pain and experience the same satisfaction with our positions. I can tell you that I’m aggressively ramping up my investments due to this selloff and if you have any decent time horizon on your money, I’d encourage you to do the same.