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Every three months we are treated to a six-week period of publicly traded companies announcing their just completed quarterly financials; also known as earnings season. Companies will release their earnings and then Wall Street analysts will scurry to compare the actual earnings to their estimates. If a company exceeds the estimates and maintains or raises the company’s outlook, many times you will see a company’s stock price rise. And of course, not achieving estimates will result in the opposite. While we don’t buy or sell investments based on success or failure over a three month stretch, we do our due diligence paying these earnings releases their fair attention. Therefore, what has the 2nd quarter earnings’ parade produced and more importantly what do they say about the future? As of the second week of August, 91% of companies in the S&P 500 Index had reported their earnings. Of these companies, 79% reported earnings above their estimates. In total, companies are reporting earnings that are 5% above the estimates, which is above the 5-year average. In addition, companies are reporting sales that are 1.3% above estimates, also above the 5-year average. Quite simply, this past quarter’s earnings are telling a positive story for our economy. But that is in the past, what about the future? Judging by this chart, the next year and a half is expected to experience similar earnings growth. Combined, based on the recent past and the near future estimates, companies are projecting to do well from a financial perspective. But, how can this be after eight years of earnings growth? Last time I checked there is no rule that says an economy can’t keep growing for nine, ten, eleven, etc. years (especially when a major corporate tax cut was just enacted). Of course, many things can happen to derail the expected growth. Political missteps that might harm versus help U.S. Companies or maybe overzealous tightening by the Federal Reserve that can crimp growth too fast. Many actions outside the control of business executives can slow this economic expansion. But, the chart above is essentially a summary of what the 500 most valuable companies in the U.S. expect to do in the coming year and a half. And it is these companies, believe it or not, that drive this economy. So, to answer the initial question, what are earnings telling us (if anything) … they are telling us we are in a good period of economic growth and it is expected to continue. Things can definitely be worse! Stay tuned to see how this plays out…

As we head into the end of the year, it seems investors are unfazed by the same old news. Throughout October, we were continually inundated with news regarding the same worrisome topicswe have heard about the majority of the year (or at least for the last six months). This includes (in no particular order): The trade war, interest rates, the pending end to the bull market, and the much-discussed impeachment of our President. With all that, the stock market (as measured by the S&P 500 Index) methodically rose 6%+. Where is all the fear and loathing!?! Like I said, maybe investors are over it! One headline that has not escaped us (or many investors) is the saga of WeWork. A wild ride for a once high-flying unicorn (a private business valued at north of one billion dollars) that hasn’t ended yet, but definitely is getting uglier by the day. It is a story that reminds us of how fortunate we are to have the American stock market in which to invest. A brief background on WeWork… they are (were) a fast-growing company in the shared office space industry. Even though this industry has been around for a while, WeWork is credited with updating it (making it cool) and offering additional perks that competitors are not offering. The business took off and as you can see by the chart to the left, drew some sizable investments from notable financial firms. This support not only drove their private valuation to over $100 billion, but it also provided the capital for WeWork to continue to lease new office space across the country. Fast forward to today (or the past month) when WeWork began to take the steps to take their company public… this is when things began to go sideways. When a company decides to go public, they need to produce documents, financials, etc. for potential public investors to peruse, dissect, and analyze with a fine-tooth comb. Well, it appears (as typically happens), the public investor is a little more detailed then the handful of private investors already invested in the company. Anything wrong (or at least questionable) that you can think of was found within the WeWork filing. Items directly related to the eccentric CEO/Founder to the path to profitability (or lack thereof) to the existing dire capital needs were uncovered by potential investors. Even before WeWork can get out and start their road show (where a company begins promoting their pending IPO), the IPO was shelved. It became clear that WeWork’s worth was nowhere near $100 billion (or even $20 billion). If they came public at such a low valuation the majority of their existing private investors would be underwater on their investment on the day the stock came public! This is not how it’s supposed to work. Early investors are supposed to be rewarded for taking a leap at the outset. Needless to say, WeWork has not come public (as of this writing) and their biggest investor, SoftBank, bailed them out with a sizeable investment to keep them afloat (i.e., in business). WeWork needed the IPO in order to raise necessary capital to keep their business, well, in business. A horrific ending (or near ending) that only highlights the power and importance of the American stock market. The highlights we are referencing have nothing to do with specific companies but more of the structure of the stock market and the requirements of companies seeking to (or already) list their stock on any of these exchanges. Some aspects that most of us overlook but somewhat form the foundation for our capitalism. I touched on the required reporting above, which gives investors the opportunity to learn a lot about a company thus helping them make an informed investment decision. Just as important, the stock market is liquid, and it has millions of buyers and sellers. These two traits are why we choose to invest the majority of our net worth in publicly listed companies. Why? Quite simply, this is how you avoid situations like WeWork. Yes, many people make lots of money by investing early in these private companies. But for every success story (i.e., Facebook, Google) there are hundreds of failures. Their stories are just not all told so publicly like WeWork. The problem (or risk) with private company investments (on this level) is that there are no sellers! It is all buyers! So naturally, valuations are going to continue to rise. And in this past decade where it is perfectly acceptable (and preferred) to forgo short term profits in order to invest for future dominance (via scale), as long as you show that you are growing market share (at any cost), your private company valuation is going to rise. For the average investor, this is risky business. We will take our dollars and invest in the stock market where with the right timeframe (long term) we can invest on the same level playing field as the guy selling us the stock. The American stock market is powerful and it gives everyone an opportunity to build wealth… We don’t take this for granted as we know it does not exist in all countries.

The tenth month of the calendar year brings lots of change for all of us. Temperatures begin to drop (more so for some than others), it gets darker earlier and earlier (proof by me getting quizzed by my kids nightly on the topic… as I put them to bed, earlier and earlier), and you can generally feel a change in the air as we all begin to anticipate the upcoming holidays. It is such a great time of year, right? Not according to the main stream financial media who has coined October as the “Jinx Month” for the stock market!?! But, is there any truth to this? Only if you read half the story! On the surface, October should be called worse than the Jinx Month. Historically, more than half of the top ten worst days for the S&P 500 Index have reared their ugly head in October. In fact, the worst day ever, known as Black Monday transpired on October 19, 1987… the S&P 500 Index closing 20.47% lower than it opened on that fine autumn day. That day along with a handful of others surely warrant a harsher moniker than Jinx Month. In addition to these one-day phenomenon’s, October is by far the most volatile month for the stock market. Of the total 1%+ daily declines of the S&P 500 Index since 1950, more than 10% of them have occurred in October… far and away the highest percentage for any month. Further evidence that there may be more to be scared of in October then just Halloween. I mean, no one likes to see their investments dramatically rise and fall… right? Well, not so fast. Apparently not everyone gets spooked by this volatility. This is where the story of Jinx Month takes a turn… a U-turn in fact. The chart to the right demonstrates that over the past two decades October actually has the best average monthly return (2.49%). Going further back (50 years) it doesn’t hold the top spot, but still ranks in the top 4 months for average returns. Not too bad for the Jinx Month. But how can this be when October is home to the one-day collapses and is so volatile?!?! Our two decades of investment experience tells us October is just a microcosm of what we see on an annual basis. But more like on steroids due to where this month lands on the calendar. There are so many market participants who buy and sell stocks throughout the year and when it comes to October these “investors” choose to sell (and sell a lot) at any hint of uncertainty. Maybe they are trying to preserve gains from the prior nine months. Maybe they need their money for Christmas gifts. Whatever the reason, we just say “thank you” to these sellers. You see, as the sellers sell, the buyers come in and buy (and buy a lot)… many times at a discount (due to the excessive selling). Ultimately (as the data reflects), the buyers take over and stock prices begin their ascent driving the October gains and typically through the remainder of the year. Needless to say, the holiday season brings great cheer to investors who can see beyond one year (or even one month). A long story short… October is definitely not a jinx to long-term investors! It is more like an early Christmas present!

The month of August continued the flat theme that we chronicled in our last newsletter. While there was plenty of volatility, driving the stock market (as measured by the S&P 500 Index) down 3% on three different occasions, the end result was a stock market that gave up 0.2%. So, typically a slow month (from a trading volume standpoint), did not disappoint in its lethargy. That doesn’t mean the last month of the summer didn’t have some sizzle. This was provided by the first sighting of the dreaded inverted yield curve! The inverted yield curve is the magical event which occurs when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds. In a normal yield curve, the short-term bonds yield a lower interest rate than the long-term bonds because investors expect a lower return when their money is tied up for a shorter period. They require a higher yield to give them more return on the long-term investment. When a yield curve inverts, it's because investors have little confidence in the near-term economy. They demand more yield for a short-term investment than for a long-term one. They perceive the near-term as riskier than the distant future. They would prefer to buy long-term bonds and tie up their money for years even though they receive lower yields. They would only do this if they think the economy is getting worse in the near-term… to make a long story short, this inverted yield curve signals a recession. In fact, it has accurately predicted the past six recessions (see chart to the right). Since it is a foregone conclusion that soon enough (probably not for another 18 months, based on history) we will be in a recession, isn’t the real question: What will we do then? What should we expect? How long will this last? But, before we give some recession clarity, what exactly is a recession? Simply, it is defined as two consecutive quarters of a contracting economy (i.e., GDP). Many of the signs you see of a coming recession are not present today, hence why there is so much debate about if we are headed for one. Nonetheless, now that we know what a recession is, what is an investor to do. Well, I’d like to provide a fancy way of saying this, but I can’t. An investor should do nothing! And if you don’t believe me, take a look at this chart to the right. The pink circles are moments of inverted yield curves and the grey areas are the periods of recession. They clearly provide the substance behind what we’ve discussed. But it’s the blue line we are interested in, aren’t we? We don’t invest in inverted yield curve or recession predictions, do we? No, we invest in the stock market (in a variety of ways) with the intention of growing our money over the long-term. Well, over 50+ years covered on this chart, we see the S&P 500 index rising many times over while the seven recessions preceded by seven inverted yield curves occurred. The unpredictability of when recessions occur and how long they will last causes many market participants consternation and many times resulting in ill-timed actions. But for true long-term investors, these tend to be blips (as well as buying opportunities) on our trek to achieving what we set out to do in the first place… grow our money!

Benjamin Graham, the father of value investing, used to say that in the short run, the stock market is like a voting machine, tallying up which firms (stocks) are popular and unpopular. But in the long run, the stock market is like a weighing machine--assessing the substance of a company. The past twelve months (ending on 8/7/19) is a microcosm of this so very true infamous quote. During this period, the stock market, (as defined by the S&P 500 index) has seen its share of exaggerated ups & downs, but where has it landed after twelve months… basically Even Steven. During the past year, there were a number of down (and corresponding up) moves for the stock market driven by actual news events, global economic concerns, or tweets from our Commander In Chief (oh, how the world has changed). Look no further than this twelve-month chart of the S&P 500 Index (S&P) performance for proof of the dramatic shifts in what many call “market sentiment.” I count no less than seven some- what eye-popping directional moves for the S&P. Now, imagine you are a short-term stock market participant (notice I did not use the term investor) and you made an investment decision based on each of these 5% moves in the S&P?!?! This would be your activity for this period: · Beginning of October: The wheels start to come off the S&P when our Commander begins to implement the strategies of his best seller, Art of the Deal, and decides to play hardball with China by announcing tariffs. So, you sell all the way into the end of the month; · Beginning of November: Look at that, our Commander, taps down the tariff rhetoric, the S&P heads higher, you come back in; · End of November: Uh oh… just kidding, Commander is serious about tariffs, down goes the S&P, you sell again… only to buy again when things appear better; · December: This time, it’s not our Commander, it’s our Federal Reserve that upsets the apple cart by raising the federal funds rate one last time (even though the Commander and many pundits believe the economy is slowing)… This drives you to sell so you can enjoy your holiday dinner in peace; · January – May: The 2018, 4th quarter concerns were apparently just a cruel joke… all is well (we are going to get a trade deal with China, the Federal Reserve is now considering lowering the federal funds rate, etc.)… so you get back into the market. (By the way, the typical response to the Federal Reserve raising and lowering rates is so short-sighted, it’s somewhat comical. If the Federal Reserve raises rates it means the economy is strong, which is good over the long-term. But if you only focus on the short term, this is considered bad since it’s going to cost more money to borrow... and vice versa)… I digress; and · May – August: The market drops then rises, then drops again to where we are today… Even Steven. (If I traded on all this short-term news clips, I would have waived the white flag. It was exhausting just typing this, let alone if I actually acted on all of this). There were other newsworthy events throughout the year but yes, much of the volatility was a result of the man at 1600 Pennsylvania, the Federal Reserve, and how people perceived these actions/words/threats would impact the great companies that make up the stock market. Well, as the chart depicts, short-term volatility was present but over the longer term (12 months in this case), the underlying value of these companies carried more weight than some threatening tweets and returned the S&P back to the level it stood at one year ago. So, to answer the question in the title of this commentary… Not really. As investors (i.e., people with a long-term interest in the stock market) you always want to pay attention to the news/events that may impact your investments but do always remember you are (hopefully) investing in great companies that over the long-term will be valued appropriately. (Even if tariffs remained for the long-term, companies will make the necessary adjustments, and ultimately create value.) In this relatively short period of time, we saw value rise to the top. Look no further than the rise from the December low for proof of this. Back to monitoring Twitter… have a wonderful rest of the summer!

One month into the year and the stock market has pivoted dramatically from where it was trending in the last quarter of 2018. On Christmas Eve, the S&P 500 Index bottomed, dropping nearly 20% from its highs that were set at the beginning of October. A sharp decline that came in a rather short period of time. Christmas day (the stock market is closed) could not have come at a better time. Since the stock market opened on December 26th, the S&P 500 Index has climbed (nearly straight up) just under 10%, helping post a 2019 year-to-date gain on January 31, 2019 of just under 8%. Quite the volatility! Was it systematic program trading, year-end tax loss selling, or the Federal Reserve’s commentary that drove this explosive decline? And on the flip side, was it a change to a more dovish tone by the Federal Reserve or investors adding back to their portfolios that has caused the subsequent up move? Quite frankly, it doesn’t make a huge difference what the reason. Investors (as a whole) got skittish and then got excited… all within a matter of a few months. As long-term investors, we sit on the sidelines and shake our heads and then we take advantage of the buying opportunities presented (if any). Maybe more importantly, this somewhat extreme volatility is a learning opportunity. Somewhere within this recent period it is reasonable to think an individual could be driven to make investment decisions based on emotions… essentially selling because of fear. Even if you timed things correctly (i.e., sold before the correction), would you have gotten back in before the subsequent rise? Most likely, no. Even worse, you might have missed the best up days. Imagine if this was your investment approach (i.e., you were a market timer)? And this is the way you always invest? Not necessarily selling at the wrong time, but more damaging, not being invested for the good times? Look no further than this chart to the right. Over nearly three decades, if you missed the 25 best days for the stock market (i.e., were not invested), your returns would mimic those of the U.S. 5-Year Treasury. One dollar invested in 1990 would be worth less than $4. Staying invested and participating in those 25 best days would have rewarded you with your dollar growing to nearly $14. Quite a difference! Long story short… if you are going to invest in the stock market, be sure to have a long-term investment approach you can commit to and believe in. You cannot time the market and trying will only cause you pain (and more importantly, lost gains).

Remember the “World’s Ugliest Dog Contest”? Well, the 4th quarter of 2018 reminds us of the winner. It was the culmination of a year that grew more and more volatile with each passing month. On December 31st, the S&P 500 Index (“the market”) logged a 6.2% decline for the year, the worst annual return in a decade (December 2018 checked in with the worst monthly performance since 1931). After nine years of positive returns one could say a negative year was in the making. You probably heard phrases as “This bull market is long in the tooth…it is due for a correction.” There is validity to this thinking, but not many saw the “correction” playing out as rapidly as it did. At the beginning of the 4th quarter, the market had a year-to-date return of nearly 10%. From there the market gave away that gain plus an additional 6%+…a 16%+ decline in a period that typically sees corrections but also experiences a subsequent rally. So, what has caused such a dramatic shift in the proverbial “investor sentiment?” Could the economy really reverse course this quickly? Is a recession on the horizon? Who knows! What we do know is that 2018 was an eventful year, both politically and financially. In fact, there are many topics du jour that investors may be concerned about. Here’s a sampling to the right of the headlines we saw daily last year. All of these topics have or will cause uncertainty for investors and some will drag out longer than others. A few are actually positive for the economy but will still produce short-term thoughts for investors and very likely cause them to take action (right or wrong). We can’t remember any recent year with so much turmoil. Much of it is self-inflicted, but depending who you talk to, it is deemed necessary. Regardless of the origin of these issues, they have made many investors take a pause and reconsider their current investment strategy/approach. As long-term investors (as we all should be), we recognize the impact of the above but we cannot lose sight of the longer investment horizon. Despite what we see in the news every day, this world continues to become a better place as the years pass. In fact, the pace of improvement continues to speed up with technological innovation. While, 200 years is a large sample size, this graphic to the right still clearly demonstrates the improved life we all live today. This big picture view is at the core of why capitalism works and why as long-term investors we are in a good position to succeed. Even going back to just 1980, nearly 50 out of 100 people lived in extreme poverty. Nearly 40 years later, the figure has improved by 80% with only 10 out of 100 people living in poverty. That is huge! This improvement, as well as the other six on this graphic, are the end result of many successes that occur over a long period of time. Yes, we will have periods like the 4th quarter of 2018 or even multiple years when we don’t experience the investment growth we have come to expect…but let’s not forget the big picture. Over time capitalism wins out and the world we will live in 10 years from now will be better than today and there’s a good chance the stock market will reflect this. As much as the media encourages you to lose sight of the big picture, never forgot that the stock market is made up of real companies that are making real profits. And as owners of those companies we fully expect to participate in their share price increases.

Through the end of February, the stock market (as measured by the S&P 500 Index) is up 11.50% year to date. This is not surprising considering the overdone melt down the market endured in the fourth quarter of 2018. Quite a reversal in a short period of time that has left the pundits wondering aloud what is going on? What happened to our cute little stock market that did nothing but methodically rise? What happened is volatility returned to the stock market. And the dreaded “V” word does wonders to the direction of the stock market. Volatility can heighten due to a number of factors including (but not limited to): the Fed raising interest rates, economic contractions, lowered business forecasts, and global political discourse. All of these examples cause uncertainty for investors and believe it or not, many investors get spooked out (and back into) the stock market based on the short-term unknown impact(s) of these factors. As investors (I use that term loosely for these folks) trade more, the volatility of the stock market increases. The chart to the right highlights the 1%+ daily moves of the S&P 500 Index by year for the past 15 years. Last year, we saw 120 days versus less than 10 for 2017. And the 2018 total was the most since 2009… our last recession. The purpose of this writing is not to prognosticate that the next recession is near (it may or may not be), but to state that volatility is back, and this is normal! Have you ever wondered why over the long-term, stocks achieve far greater returns than bonds? It’s because you get rewarded a premium for riding out the volatility of the stock market. Unfortunately, there are many individuals who fancy themselves investors, but do not stay invested when uncertainty appears. The damage these investors do to their own portfolio is shocking. The latest Dalbar study, which examines the average investor’s behavior on an annual basis and compares it to the general stock market, was just released and it clearly reflects that individuals and volatility do not mix! In 2018, the S&P 500 index sustained a 4.38% dip, while the average investor’s portfolio gave back nearly double that, 9.42%. We read this study on an annual basis and it is crystal clear that the return of volatility in 2018 is the main culprit for the drastic underperformance. As we trudge through the rest of 2019, let’s remember that volatility is back, but don’t let it freak you out. It belongs in a normal stock market and over time is a key factor in investor returns… not to mention price declines (the cause of volatility) give us opportunities to make even better long-term investments. Let’s embrace the volatility, hang tight and ultimately achieve the returns we deserve versus the average investor return.

Six months into the year, the stock market (as measured by the S&P 500 Index) is slightly above where it began the year. Officially, the market is up 1.7% as of June 30, 2018. If you were sleeping or just don’t pay attention to the daily market minutia (which we highly recommend), you definitely missed the ride (so good for you)! Before we even watched the Super Bowl, the stock market raced out to a 7.5% gain only to retreat into negative territory (down 3.5%) right after the Big Game. This up and down price movement continued throughout the first quarter only to relent to a more gradual rise in quarter two landing us at the positive 1.7% return to end the first half of 2018. In summary, volatility has returned, and we could not be any more excited! As value driven, long-term investors we welcome volatility with open arms as it provides for more investment opportunities. Naturally, when there is a level of hysteria amongst market participants, there is no doubt some stocks suffer unwarranted short-term price declines. Needless to say, this provides the opportunity for us long-term investors to make investments on the cheap! We definitely like seeing the stock market rise, but a few blips here and there is truly beneficial! Throughout the past six months, we asked ourselves two questions: 1) What is driving the newfound (and appreciated) volatility and 2) Will it have a long-term impact on our investments? Simply, this volatility is the result of political and economic initiatives (i.e., Changes from the status quo). On the political front, right or wrong, President Trump is definitely trying to get things done. As it relates to business and subsequently the stock market, his tariffs and tax cuts have gotten the market’s attention, creating uncertainty and thus a more volatile market. As we’ve stated in the past, the typical investor (both professional and individual) do not like change and uncertainty! On the economic front, the Federal Reserve has begun raising rates. This, by itself, typically moves the market in one direction or another. Throw in the somewhat unknown impact of President Trump’s initiatives and short-sighted investors are concerned. The Federal Reserve does have a herculean task of getting this right (i.e., tighten rates just enough to keep the economy from overheating but also not tighten too much sending us into a recession). Maybe that’s why they get paid the big bucks (or not)! In summary, these past six months have seen a lot of activity and some things that are clearly negative for businesses. So, why then is the market still above water? Clearly, the economy is in very good shape as even proposed tariffs and higher interest rates have not totally derailed it. As we move into the second half of the year we expect more noise, especially from the Capitol. We will buckle up for the ride, digest what comes out of Washington and control what we can control… investing in quality companies at our price. Discipline and patience typically win out over the long-term!

The world of investing is full of phrases that some participants live by while others scoff at. On the one hand, Wall Street (the place where many of these sayings originated) has been around for over two centuries, so you have to think there is some truth to these phrases. On the other hand, if an expression was born 100+ years ago, does it really resonate today? Either way, what most intrigues us is what is the meaning of the phrase and more importantly, how does it affect our investment approach? “Sell In May & Go Away” is a well-known adage that warns investors to sell their holdings in May and do not return to the stock market until November. The theory is… by doing this you will avoid the most volatile six months of the year (especially October) thus not subjecting your portfolio to potential “losses.” In addition, this period is mainly the summer months when the “professionals” vacation… so, of course, they wish to sell before they leave. This thought definitely demonstrates how old this phrase is, as we all know in this technological era no one takes a legitimate vacation (i.e., we are always connected)! Therefore, these days, I highly doubt investors are making investment decisions based on their vacation plans! Now that we know it’s origin, is it true? Are you better off selling prior to this six-month period? The answer is… No! Yes, it is true that the November – April period outperforms the May – October period, but the latter timeframe still yields a positive return. This has been especially true since 1980 (see the below graphic). If you are an S&P 500 index investor and you acquiesce to the old adage, you are giving up 1.90% in annual returns. In addition, if you are investing in a taxable account, you most likely have exposed yourself to capital gain taxes, and lastly, you have put yourself in the position to have to reinvest in November subjecting yourself to trading fees to buy back into the index (of course you paid this fee when you sold in May as well). That is a lot of activity and cost to avoid positive performance. I’m not sure who conjures up these phrases, but this one has obviously missed the mark (at least since 1980). Maybe an ulterior motive is at play here? I mean, whether you realize it or not, traditional Wall Street is a transaction-oriented business. Meaning, those folks you see on TV, they make a lot of their money when they make trades. Maybe this is why this saying came to fruition. It does guarantee two transactions! Whatever the case, us long-term investors, we’ll simply take our vacations fully invested! Period.

At any given time, a consistent question of financial professionals is: What do you think the “market” is going to do? After nearly a decade of a rising stock market, this question morphs into: When do you think the “market” is going to drop, crash, correct, etc.? Needless to say, today’s stock market stokes the latter inquiry quite often. We are in a 9+ year bull market, it has to end soon, right? Well, this ticking time bomb mentality has reared its ugly head once before. In fact, stock market history is littered with failed predictions. More pertinent to this discussion, just the prior 5 years has more than its share of less than accurate bold forecasts predicting the reversal of this strong bull market. The below chart demonstrates (quite effectively) the inability of market pundits in calling market tops (or corrections). In fact, some of these “professionals” have multiple calls. I guess you will never be right if you don’t make prediction(s). But how many times do you want to be wrong before you give up your seat at the fool’s game of trying to predict stock market returns? If you heeded the advice of any of these prognosticators and exited the stock market, you missed out on anywhere from 10% - 100% returns… assuming you got back into the stock market at some point in the last six years. Painful! So, what’s an investor to do? We agree that at some point the stock market will experience a correction. But, we definitely don’t try to predict when this is going to happen or to what degree. As you can see above, the fallacy in this approach is and will be quite damaging for as long as stock markets exist. I firmly believe that people trying to time the stock market is what gives new potential investors the erroneous thought that the stock market is a form of gambling! If we followed an investment approach that required us to “cash out” of our investments when we felt the stock market was at a top, we’d probably view it as gambling too. Now, believe it or not, this is not the biggest issue with trying to call a market top. Because at some point, someone, somewhere is going to be right. Make no mistake about it, stock markets do correct… and someone will be there to say “Ah ha! I knew it! I called it!” And if I’m in ear shot, I will return that with “You did it. Now, can you tell me when to get back into the market?!?!” My guess is, I will hear the equivalent of crickets for the response! Predicting the stock market direction correctly one time is quite the feat. Doing it a second time (back to back), in a short period of time, would be unbelievable (quite literally)! So, to make a long story short, to answer the question of when we think the stock market will crash, drop, correct… I don’t know and really don’t care. As long-term investors, our concern is that we have the correct investment time horizon to weather a correction… 100 years of history is a strong sample size to rely on.

The month of April has brought a collective thud for the stock market investor. Overall the S&P 500 Index finished positive for the month, up .38%, decreasing the year-to-date loss to -.38%. As we’ve discussed in prior newsletters, volatility has returned, driving the market down 3% during the month, only to rebound 6%+, then land at .38% to end the month. Essentially, a whole lot of something for nothing. But, as most “investment professionals” will tell you, the stock market is forward looking (i.e., what is going to happen next to impact these businesses). And April is a great example of this as it is the first month companies begin to announce their first quarter financial results. An anticipated event by most but in reality, for the majority of companies it’s the same song and dance every year! And it is this that creates a fantastic opportunity for us… the long-term investor! Here’s how it works for the majority of companies. (In parentheses is the stock price reaction): · ABC Company will report its financial report, · Wall Street analysts will compare this report to their estimates for ABC Company (price moves up or down based on earnings beat or miss), · ABC Company management will hold their quarterly earnings call to discuss said financial report, · Wall Street analysts ask a bunch of questions, · ABC Company management gives a conservative outlook for the rest of the year (price goes down), and · Lastly, if we are lucky, Wall Street analysts come out with new (many times) lower price targets for ABC Company. This scenario plays out routinely for many companies. Many factors are in play here that all share a common characteristic… a short-term view. ABC Company management is giving guidance for the rest of the year and the Wall Street analysts are reacting to it. This is an event that takes place every quarter, but this specific one takes on even greater importance as it is a review of how the year started and how well management thinks the company will do for the rest of the year. Analysts and subsequently “Mr. Market” is going to react… and the opportunity presents itself! Of course, not all companies fall into this category, but many do. And in 2018, where many stocks are priced to perfection, even a slight conservative forecast will drive a stock price down. See the above chart of 3M as an example. Here’s a stalwart company firing on all cylinders that lowered their earnings guidance by a mere 1.5% on 4/24/18. The result was a drop of 9% by the end of the week!?!?! Can you say “overreaction” to short-term news! For us, if we own stock in a company, we’ve made this investment not based on the next 9 months, but multi-year expectations. If the short-term guidance does not change our long-term view on a company, we will naturally take advantage of Mr. Market’s opportunity and buy more. While April seemed boring from a performance standpoint, it is the beginning of a great period to do some bargain hunting!