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Market Snapshot: Finding Fundamentals Again

Happy September! If you’ve been keeping a finger on the pulse of the markets, you’ll no doubt have noticed what we have: a rise in volatility. Volatility can give even the calmest investor the jitters; it’s one of the reasons we use enhancements to our investment models – things like sell calls in our Large Cap model and inverse ETFs in our All Cap model. We believe that it's a way to curb these concerns.

But dealing with volatility isn’t just a matter of tactics — it requires a specific mindset, too. That’s what I’d like to explore in today’s note.


Playing in the new sandbox

With a non-stop flurry of daily tweets, it’s easy to think the market is in a state of constant change. But, from our standpoint, the real change happened during and after the 2007 – 2009 economic downturn.


Remember that during these years, dramatic top-down intervention occurred to prop the system up, all in reaction to the short-term seizing that was stifling the flow of capital. Now, I don’t have the time here (or the willpower!) to get into debate about whether this was the correct move or not — for better or worse, it happened. The important takeaway is simply that in many ways, we moved away from a focus on fundamentals towards one based on macro-economic events.


Our mindset changed, too. A downturn like this generates a lot of fear, and that fear leads many investors to start thinking and acting very short-term.


For example, on Wall Street, many firms hired statisticians to run correlations and create algorithms, all built to react immediately to certain market conditions. These algorithms, while robust, aren’t built to answer longer-term stock questions — they’re made to quickly wash investments from one side of the tub to another. If, for instance, interest rates compared to the price of oil break a certain threshold, bam — automatic, reflexive investment moves.


I’m not here to judge this shift towards short-term plays. After all, it’s normal given the experience many went through: if you got burned once, it takes a lot of convincing to put your hand back on the stovetop.


Here’s the problem, though: this mindset is entirely incongruent with making money in the stock market.


Why? Many of the best companies are operating on strategic plans that take years to execute. These plans cut through the daily noise and, yes, even recessions.


Take a look at some basic numbers for roughly the past 15 years.


Total Returns from 1/2/04 to 9/4/19

Source: Worden TC2000


IEF (7-10-year bond ETF) 35.8%

SPY (S & P 500 index ETF) 163.06%

IWM (Russell 2000 index ETF) 163.36%


You don’t need to be an experienced investor to see the powerful difference between being in stocks versus bonds. And, keep in mind — these returns include the entire 2007 – 2009 downturn. Plus, these are just the indexes. Let’s look at some individual securities over the same period.


Total Returns from 1/2/04 to 9/4/19

Source: Worden TC2000


Microsoft 456%

Walt Disney 477%

Home Depot 533%

McDonalds 778%

Nike 920%

Starbucks 1043%

Apple 13554%


These returns didn’t happen overnight, and they weren’t the result of an algorithm making fancy plays. Rather, these companies did the work to answer their customers’ needs and created real value through increased sales and productivity. The teams in these firms were able to navigate economic challenges, because at the end of the day their businesses are fundamentally sound.


How can we pinpoint these companies? Fundamental analysis. Watching their progress over the long term. Doing the homework to see if everything makes sense under the hood.


Of course, our models can shift to cash to buffer the effect of a downturn, but our thesis still sits strongly in the belief that equity investments in solid companies is the path to real growth. After all, it’s this growth that builds and keeps peace of mind for our clients.


Recessions happen — we can’t avoid them. Markets move and shift in the short run, exacerbated by an influx of automatic trading mechanisms.


But, if you can, step back and look beyond the noise. Study the fundamentals of the firms you own and put your trust in them over tweet storms. Have patience and focus on long-term wealth building — your future self will thank you.


Cheers for a great autumn,

Tim



The opinions expressed in this commentary are those of the author and may not necessarily reflect those held Twin Gryphon Advisors, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.


Investment advisory services offered through Twin Gryphon Advisors, LLC, a registered investment advisor.


The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.


The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.


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