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Real Ownership Stakes

| December 20, 2018
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The New York Times ran two separate articles in its recent Sunday Edition carrying the following headlines:

“Assume Crash Position”

“The Best Place to Put Money? Your Mattress”

I couldn’t help to think about one of my all-time favorite cartoons which I have saved to the desktop of my computer when I saw both of these.

 

As we’ve discussed in previous commentaries, stock markets around the globe have experienced a bit of turbulence in recent weeks and, as is natural in the financial media, this has led to articles like these as well as multiple others of the sort—“fear sells” after all. As of the market close on December 13, the S&P 500 Index was down slightly more than 13% from its all-time high on September 20, according to data from Ycharts.

 

Rather than review the historical record and cite statistics showing that these types of declines are really quite common place in stock market investing, in this commentary, I’m instead going to talk about stock investing and market volatility a bit more broadly and theoretically.

 

When I talk to family, clients and friends about what feelings or images come to mind when they think about investing in stocks I’ve often heard them describe sentiments such as “risky” or “volatile” or images of fast-talking people on CNBC intermixed with rapidly moving charts and blinking red and green lights or, for some, a description of the “market” section of the newspaper filled with stock quotes and a very technical-looking charts.

 

In his wonderful book, The Little Book of Common Sense Investing, Jack Bogle, the founder of Vanguard, quotes Roger Martin, the former dean of the Rotman School of Management of the University of Toronto, who describes stock investing as consisting of two separate games: “One is the real market, where giant publicly-held companies compete. Where real companies spend real money to make and sell real products and services, and, if they play with skill, earn profits and pay real dividends. This game requires real strategy, determination, and expertise; real innovation and real foresight.”

 

The other, loosely-linked game, according to Martin is the expectations market where “prices are set not by real things like sales margins or profits. In the short-term, stock prices go up only when the expectations of investors rise, not necessarily when sales, margins, or profits rise.” Conversely, prices decile in the short-term when expectations fall which may or may not be at all related to what’s actually going on in the real market.

 

Readers will be quick to note that for many of us, the images that immediately come to mind and our gut feelings about stock investing are primarily related to the second game, the expectations market, which Bogle describes as “a giant distraction.” According to Bogle, “The expectations market is about speculation. The real market is about investing.”

 

I think most all people would view stock investing entirely differently if rather than intently focusing on the day-to-day gyrations of the stock market they instead turned their attention to what stock investing really is—holding real ownership stakes in publicly-traded companies. Real ownership stakes which allow us to share in the long-term success and prosperity of these companies as they earn profits and distribute them to shareholders (i.e. owners) through dividends and share repurchases.

 

I think many of us would feel very differently about the market’s recent declines if instead of thinking about the S&P 500 Index as some abstract concept or as a market index that’s now 13% lower than it was two months ago (and that has pulled the value of our accounts down with it), we thought of it as a very broadly diversified collection of great companies that sells the goods and services that are integral to every facet of our daily lives. For instance, a brief glance at the largest constituents of the S&P 500 Index would reveal that the index is comprised of great companies that sell:

 

  • The smartphones we carry in our pockets
  • The software that makes us and our companies more productive
  • The immense array of goods that we can buy with a single click and that arrive at our door the next day
  • The banking products that we use to safeguard our savings and facilitate the purchase of our homes
  • The medicines that we take to cure our illnesses and alleviate our aches and pains
  • The fuel needed to keep us warm, drive our cars and fly on planes
  • The search engines that provide us instantaneous access to more information that was ever imaginable decades ago
  • The wireless services that allow us to stay connected to the global information network
  • And many others…

 

When thought about this way, a 13% decline in the index means that this basket of great companies is now available to be purchased for 13% cheaper than it was two months ago. Viewed in this light, we can look at the S&P 500 Index’s 13% decline much in the same way that we looked at all of those great Black Friday deals we relished in few weeks ago—an opportunity to buy things we want at a mark down. Or as Warren Buffet once put it “Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

 

None of this is intended to dismiss the very real sense of angst and unease we all naturally feel when markets are falling as they have been recently. Rather, my intent here is to hopefully help reorient our collective focus on stock investing to view it more for what it really is—holding ownership stakes in great companies the enable us to share in their long-term prosperity—as opposed to a vague, abstract concept far too often associated with sharp gyrations and flashing red and green graphics.

 

This is also not to suggest that markets will immediately rebound. They very well may immediately retrace the lost ground and resume making new all-time highs. They might also decline another 13%, or more. No one knows for sure. I do know, however, that I remain ardently optimistic about the collective future of the world’s great companies and that I believe that in the long-run, holding real ownership stakes in a diversified set of global companies will be a financially rewarding endeavor.

 

Volatility is ultimately an inherent part of investing. It’s no doubt unpleasant but in my mind, it’s worth bearing as the price of admission for sharing in the prosperity of the world’s great companies. It’s also why we place so much emphasis on truly understanding each our client’s unique goals, time horizon and objectives prior to constructing a portfolio for them. It’s so that we can be sure that the portfolio we build for them is appropriately calibrated to their individual needs and ability and willingness to withstand these inevitable ups and downs so that they can remain confident in their ability to achieve their long-term goals in the face of periodic turbulence.

 

For investors holding portfolios that are properly tailored, we view these bounds of volatility as unpleasant but a natural part of anyone’s long-term investing journey. For investors that aren’t sure if their portfolio is properly calibrated of that just want to talk things through, give us a call or send us an email, we’d love to talk. That’s what we’re here for.

 

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All investing involves risk including loss of principal.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

  

INDEX DESCRIPTIONS

Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

  

Investment advice offered through Private Advisor Group, a Registered Investment Advisor.

 

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