Earnings Bring Market Up, Trade Fears Take it Back-
Really, what matters, in the long run, is sticking with things and working daily to get better at them. Angela Duckworth
When you are growing up as a kid, many times your parents or teachers want to occupy your time doing things you might consider trivial. For example, they might give you word puzzles to solve where you have to find the word by searching through letters while the word is configured backward, diagonally, or vertically. I loved those kinds of puzzles as they typically involved distinguishing a pattern and following it. In sports, especially in the big three sports of football, baseball, and basketball, recognizing situations where there is some kind of mismatch in terms of player ability is important for a team to benefit from the team's personnel advantages. Once that situation is located, teams keep going back to that matchup in order to try and win. Again, it is similar to finding a pattern that works and sticking with it. When one researches the history of many companies which have been successful, there is often a pattern in how they have built the organization. In many cases, it is built on organic growth (from the natural growth of primary business), and in others, by multiple acquisitions. Over the last ten years, the biggest companies have used important purchases to benefit their shareholders, with the most prominent ones being Google swallowing a nascent Youtube and Facebook’s buy of Instagram (which was widely panned, I might add). Clearly, there is not one blueprint of how to build a great company, which makes sense. Similarly, there is no one right way to invest, but plenty of approaches and strategies to choose from. So, what’s my point?
I think it is important to realize the limitations of any entity, whether it is a single individual, a small company, or a larger business. In any endeavor, success is not easily attained, so when earned it is important to analyze what worked and why. Initially, continuing to repeat the same thing that has worked probably makes a great deal of sense. If we were to take a look at the important topic of portfolio management, the idea of sticking with what has worked is a question of much controversy in the investment world. The concept of rebalancing or taking some gains from your winners so a portfolio's value is not concentrated in one or two holdings is viewed from a risk management perspective as a standard operating procedure to prudently manage a portfolio. Interestingly, the best investors who ever lived, Warren Buffet and Charlie Munger, believe that selling positions which have appreciated makes no sense, regardless of how much concentration they represent in a portfolio (Munger is adamant about keeping your best holdings). Me? Glad you asked, but my experience is that one is fortunate to own a stock which has appreciated a great deal, so holding on and sticking with what works is usually the strategy I would advocate with the caveat that each situation is different, and many clients get nervous if one position is too much of their portfolio’s total value. Regardless of how one approaches the portfolio management issue, sticking with what works is high on my list of how to build on success, just as Mrs. Duckworth wisely noted.
In the market last week, Google led off the week with good top line growth but concerns about costs, a lingering issue which many thought had been solved over the last year, dinged sentiment from investors. Electronic Arts added to the pain in the video gaming sector with a miss, while Estee Lauder, long the champion in makeup, continues to sell plenty of beauty products. Snap, forever a whipping boy in the internet area, surprised on the upside and some even think positive cash flow could be on the horizon, although they better hurry up as others predict they might need another cash raise. Disney bested estimates and has added two million subscribers to it’s new direct to consumer platform. Only ninety-eight million to go, but I would not count out the Mouse House. Chipolte posted a strong number, continuing to justify the CEO hire from Taco Bell and Yum Brands. Finally, in the financial area, BB&T and Suntrust announced a merger of equals to form the nation’s sixth largest banking entity, which I am sure will make Elizabeth Warren happy.
Speaking of Mrs. Warren, she, Chuck Schumer, and Bernie Sanders, along with Alexandria Ocasio Cortez, have decided to make official their expertise in capital allocation. You see, Warren wants a wealth tax, anybody with assets over 50 million pays another 2% with billionaires another 1% as well. Mrs. Cortez is a little different, proposing tax rates of 70% on earnings of over 10 million. Mr. Schumer and Bernie, not content to just reward us with their expertise in legislative matters, have proposed restricting stock buybacks by corporations until they reward workers with higher wages and benefits. Maybe we should mention that these are the same individuals that have long been involved in a government which is now twenty-one trillion in debt and running trillion dollar deficits, meanwhile, they take home lifetime benefits and draw salaries of over one hundred thousand dollars a year. When was the last time we saw a budget passed, by the way? Elsewhere, a guy who has made plenty of people quite a bit of money (full disclosure- me included) through the growth of Starbucks stock, Howard Schultz, cannot get a sniff from that same Democratic party and is forced to run as an independent. If Democrats were smart, they would reconsider their treatment of Mr. Schultz as given his private sector accomplishments, he actually knows what he is talking about when it comes to capital allocation decisions. Don’t hold your breath on that one, though.
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.