Stocks Crushed (-7%) On Fed Hike and Uncertainty!
‘If you’re not willing to react with equanimity to a market price decline of 50 percent or more two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.’ Charlie Munger, (Interview with BBC, 2012- taken from Chapter 14- Big Mistakes, The Best Investors and Their Worst Investments, Michael Batnick, Bloomburg Publishing, May 22, 2018- John Wiley)
If you are like 99% of all citizens, you earn your money each day by working at an occupation. There are all kinds of jobs in the world and one is fortunate if you are able to have a profession that you enjoy doing. Most people do not like their jobs but they have to pay the bills, so you endure and cope with the job as best as one can. As I started my working life as a school teacher, I very much understand the trials and tribulations of earning a wage and how difficult it is for nearly everyone. When you put in long hours at work and have interaction with the public, there are bound to be some stressful moments. Naturally, it can affect how you perceive your compensation. Typically, and for these very good reasons, most people understand how difficult it is to earn money and to not waste it. The reason why many people turn to the stock market is it has a history of helping people build their wealth over a long period of time. In fact, stock ownership has been the highest returning asset class over extended durations. There is, however, the key point that over a shorter interval, lets call it one year to five years, anything can happen. As most people learn from the disclaimers, past returns are no guarantee of future success. With that said, the last three months have been tremendously difficult for anyone owning stocks. If one includes what has taken place across the globe, the last year might rank as one of the hardest environments to make money as any one year time frame in the last century. The Great Depression and bursting of the internet bubble were very tough as well, but let’s be clear, it has been quite painful to be an owner of a piece of a public company, especially last week. When an asset class loses seven percent of its value in five days or less, that is quite painful. Make no mistake, I am right there with you in terms of understanding the magnitude, severity, and economic pain by owning stocks. However, let’s take a step back and refresh our historical memory to provide some further context.
The initial quote from Mr. Munger is a reminder that if you want to own stocks, you have to be prepared to endure the difficult periods. It may not seem like it from the last three months, but as we lengthen the time frame out, three years, five years, ten years and more, a piece of business ownership will reflect the profitability of the business and the ability to grow those profits. Many factors can affect what transpires in a short time frame, as can be seen by what took place during the downturn in 2008. Much of that was related to poor lending decisions in the home mortgage area over the preceding three to five year period. Stocks lost nearly half their value in a year, and had recovered half of the loss in one year, and all of it in the next two years. Mr. Munger lost almost 65% of the value of his investors capital in the 1973-74 time frame, and recovered all of it the following year. He and Buffet subsequently built Berkshire Hathaway into the 500 billion dollar enterprise it is today. Historically, some recoveries are quicker than others, for example, the crash in 1987 was recovered in less than nine months. So, as equity owners, if you own good businesses with strong managements, a solid business model, and plenty of cash flow and income, there is a very strong possibility that the recent losses are not permanent. Let’s ponder the selloff and some reasons for its cause, and what might be in store for stocks as we look out a few months.
First, all over the globe investors have been losing money in nearly every asset class. Each situation is different, but if an enterprise or individual is borrowing capital to make investments, there is the risk of having to sell holdings to cover liquidity needs. With one week to go in the year, taxes are a factor for every entity, so taking losses to be tax efficient is standard operating procedure for any company in the financial services area. Last week, when the Federal Reserve Chairman raised interest rates by twenty five basis points, he indicated that two more hikes in 2019 were still on the table. Investors hated the way Powell communicated the rate hike at his press conference because there was very little recognition of the weakness in recent earnings reports from large companies. Yesterday, with no budget for 2019 in place, the disagreement over funding for a border wall cemented the reality that certain parts of the federal government will be closed. The trifecta of a rate hike, messaging dilemma, budget failure, along with Secretary of Defense Mattis resigning, spelled disaster for equities. In sum, anything that could go wrong did, along with some seasonal issues. However, in a week the year will be over, and the tax loss issue goes bye bye. It also wipes the slate clean all over the globe as well. There will probably be some pressure early in 2019 for funds which are getting redemption's from their investors. It will take a month or so to digest that issue as well. As we move deeper into January, earnings reports will start rolling in. The selloff has reduced the hurdle rate for many companies to have operating results that investors will find acceptable enough to not sell off their stock, because, low and behold, that’s already happened. So as we get through the first quarter and move into spring, if the economy holds up and doesn’t go into recession, which is almost priced in now, a boring but steady market would be the ideal scenario for equities to claw back their lost ground. However, there is that little issue of the ding dong politicians.
Over a long time frame, our inept representatives aren’t going to affect how a specific company will perform. They do impact all kinds of matters which affect the market, think trade, taxes, interest rates, budgets, etc. Investors see the progress, or lack thereof, and sell first and ask questions later. Clearly that already took place. With gridlock imminent, the political circus probably isn’t going away any time soon. At some point they will solve the budget impasse and the closed parts of the government will reopen. As an individual investor, you can control your actions and mental approach. Staying healthy, remaining positive, paying attention to the companies you own and how their businesses evolve, and being tax efficient are all constructive steps to having a long term approach that reduces the inclination to run and hide when things are difficult. It is unrealistic to expect anyone to have anywhere near the success of someone like Mr. Munger, but we certainly can learn from his counsel regarding approach and temperament, can’t we?
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.