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As we noted in our February newsletter, our old friend volatility has returned to the stock market. Look no further than our first chart to see the ups & downs of the first quarter… A run up to start the year, a sharp decline into negative territory in February only to see a slight rebound by month end, then a retreat in March to end the first quarter in negative territory (S&P 500 Index down 1.2% as of March 31, 2018). Let’s just say the tune has changed on Wall Street. To get a better sense of the level of volatility, we’ve included a second chart showing the stock market price movement for the first quarter of 2017. Quite a different story. You would be hard pressed to find any extended period in 2017 that shows the action we saw in this year’s first three months. Love it or hate it, welcome to the stock market! The question on everyone’s mind is “What is causing all this stock market volatility and driving it down?” One word: Uncertainty! If two plus decades of stock investing has not taught us anything else, it has taught us that the majority of stock market participants DO NOT like uncertainty! Believe it or not there are “investors” who do not take a long-term view of stocks. Therefore, short-term volatility makes them nervous. In our eyes, this is not investing, it’s speculating. But, I digress. So, what uncertainty has been unearthed over the past three months that has shaken confidence in the great bull market? The topics du jour: 1) A potential trade war, 2) Increased regulation on tech companies (The Facebook hearing spurred this), or 3) The Federal Reserve and their ability to navigate the relationship of inflation and interest rates… or more to the point, is the Fed going to put a halt to our “cruise control” economy by raising rates too fast and too high? If we had to choose, our biggest concern would be door number three. Tightening of interest rates will impact all things economic, which to the right level and at the right pace will ultimately be good for extending our bull market. But, if the Fed misreads the economy, they can potentially put an end to the good times. We’ll continue to watch these folks, but we definitely welcome some volatility as all it does for us long-term investors is create buying opportunities. We can’t ask for more than that, especially in a strong economy.

Ever since our President has begun reworking our Country’s trade agreements with our major trade partners, tariffs have taken center stage. It appears, all parties involved (especially China) realize the sooner new trade agreements are in place, the better. I could not agree more. That being said, now is as good a time as any to dig into tariffs and how they work. Tariffs are a “tax” on products imported from a specific country and the tariff is paid to the importing country. That’s the simple part. Things get a little murky when it comes to identifying who is actually on the hook to pay the dreaded tariff. The businesses importing product (and/or materials) are the ones responsible to pay the tariff but do they actually pay it? At the outset, yes… but going forward don’t count on it. So far, businesses are doing their best to absorb the tariffs without passing this tax onto the end consumer via higher prices. They do this through internal cost cuts and/or taking a hit on their profit margins. But, the longer these tariffs are in place businesses will attack them three ways: 1) Ask their manufacturers/producers in China to cut their prices, 2) Raise prices they charge the end consumer, and 3) Find alternative countries to replace China as their preferred manufacturer. Vietnam is at the front of the line. Now, with our simple definition of a tariff established, the real question(s) is what will be the impact to the #1 & #2 global economies if tariffs impacted the current import/export business between each country. Looking at the numbers, it is clear China is more reliant on this country, then vice versa. The United States’ gross domestic product (GDP) hovers around $20 trillion, while exporting just about $120 billions of product to China. This is less than 1% of GDP. As for China, their GDP is $12 trillion or so, and they export $520 billion to our Country. This is nearly 5% of their total GDP. The numbers don’t lie. Our nation of consumers contributes more to China, than the Chinese contribute to ours. So why are so many business leaders in an uproar over tariffs and the threat of more tariffs? Quite simply each business fights its own battle. To some, the China market is more important than others and they are not only counting on China’s manufacturing capabilities but also their market of nearly two billion consumers. There is huge opportunity there and businesses do not like upsetting the proverbial apple cart. There may be some pain in the short-term as our President is leaning on tariffs to get new bi-lateral trade agreements in place. Forcing businesses to make decisions to best deal with the impact of said tariffs is just part of doing business in the short-term. Over the long-term the USA has the upper hand in this negotiation. If we are to assume that China wishes to continue on its path of economic growth that has improved it’s country’s living standards, lifting many from poor to the middle class, then it would be in their best interest to come to an agreement with the USA. The citizens of China want Starbucks in their country. They want to have choices amongst mobile phone providers. They are interested in spending money on fashion. They enjoy living in a somewhat capitalist society. Over the longer term it would be tough to imagine their leadership changing economic course simply because the USA wants a fair bilateral trade agreement.

February marked the first down month (-3.89%) since March of last year. And the drop of .04% in that month was so minuscule you had to squint to see it! In fact, you have to go back twenty-five months to January 2016 to find a worse performing month than this past February. Needless to say, quite the run for the stock market, which may be the reason for such an abrupt change in market sentiment (i.e., how people feel about the stock market). Adding fuel to the fire, volatility picked up during this past month to a level not seen… well, since January 2016. Over a two-week period, the stock market gave up 10%+, only to regain nearly all of it before month-end. Price drops for the Dow Jones registered in the 1,000-point range. Measured as a percentage, definitely not as dramatic, but as we all know, drama sells, so we heard a lot about the 4 digit drops! As we head into March, what does the volatility and subsequent price drop(s) in February tell us to expect for the rest of the year? Well, I couldn’t tell you (nor should anyone else) where stock prices will be in the short-term. But, if this past month is any indicator of the rest of the year, it tells us the stock market we have known (as being participants) for nearly two decades, has returned! Meaning: · Volatility is beginning to return, driven by different opinions, · Fear is returning to the market, and subsequently, · Investors are seeing opportunities in the stock market (driven by the volatility). All of this is due to the specter of interest rates rising. While rising rates is an indication of a strengthening economy (which is good), it also gives investors options other than the stock market. Many market participants seem to have amnesia and forget how low interest rates are… especially historically. These low rates essentially has made the stock market the only game in town (i.e., there was no reason to own bonds or other interest rate dependent investments). Well, as rates rise, this will definitely change. As long as the economy continues to strengthen, and our beloved Federal Reserve does not raise rates too fast, investor behavior (i.e., overselling stocks beyond fair value) will create buying opportunities for those willing to hold for the long-term!

Nearly six weeks into the New Year, the question on most investors’ minds is: “What the heck happened to my stock market that essentially goes straight up!?!?” Well, there are many explanations for recent “market concerns.” They include: the economy is heating up, wages are finally growing, unemployment is super low, and the anticipated impact of tax cuts. But, these are all subplots to the main storyline to this sudden change in stock market volatility and subsequent decline… Interest rates! Whether you have realized it or not, interest rates have been declining for the better part of 35 years! Arriving at a low where it would really be hard to go any lower. And now, with what looks like a sustainable growing economy, inflation should pick up which will force the Federal Reserve’s hand in raising interest rates. You may be asking, all of that sounds good so why should I care if interest rates rise? Over the long-term, this is a correct point of view. Rising interest rates indicate a healthy economy, which is good for all of us. In the short-term, as interest rate increases (or the anticipation of) changes the nearly free money environment we have been living in for the past nine years, investors will begin to consider investments other than stocks. Bonds will begin to have higher yields, decreasing the volatility premium you get paid to invest in the stock market. Essentially, the question of where to invest your money becomes more of a question versus the free money era! So, what is an investor to do as interest rates rise (or the increased likelihood of future rate raises)? If you are a long-term investor (like us), you sit back and wait for the discounts created by the short-sighted folks and then make some investments on the cheap. Yes, the stock market has had a great run-up (which will exasperate a decline), but we’ve seen this movie before. With a good economy that only seems to be getting stronger, rising interest rates are expected and we should all benefit from it over the long-term.

AN INVESTING REFRESHER There is always a bit of excitement in the investment community when it comes to thinking about what the new calendar year will bring us. Will we see an up or down year? This year, with the swearing in of a new, very polarizing President, people’s energy is high (both positive and negative). So we think it is a good opportunity to revisit our age-old core investment philosophy. These are the backbone to our investment success, and what keeps us grounded during great recessions (i.e., the Financial Crisis of 2008/2009) and euphoric markets (i.e., the Internet Bubble of the Late 90’s). So, without further ado, we hope the information below brings you the same peace of mind we have when investing in the stock market: WHY WE INVEST IN THE FIRST PLACE: As we tell our children, there needs to be a reason why we do “anything” we do. When it comes to investing that why is quite simple… capital growth. Furthermore, we want to grow our capital so we have a better future. The better we are at growing our capital, the more flexibility we will have down the road. This is the real reason we invest… give yourself future options. We like to say that you can become rich by earning a good living and saving well… but you can only become wealthy if you invest! For the 99.9% who work a regular job, investing is the vehicle to creating this wealth and ultimately achieving financial freedom! THE 8TH WONDER OF THE WORLD: Now that we have been reminded why we invest, how do we grow our money at a pace greater than 1) The inflation rate 3.2%, but more importantly, 2) At a meaniful rate? We invest! This does not mean we just put money to work in the stock market or we buy real estate rentals. Regardless of where you put your money, invest means we keep it invested for the long-term in order to take advantage of, as Albert Einstein put it, The 8th Wonder of the World… also known as compounding interest. Just like inflation, compounding interest (or compounding your money) is somewhat hidden, but it is there. And as investors we need to stay invested for the long-term to realize it (and the sooner we start investing, the better). We all know the longer you keep your money invested, the more money you will ultimately have. But do we know why? As you see in the chart above, it’s the compounding interest. Over a 20-year period, the interest related to compounding is almost as much as the regular interest + the original deposit. Truly a wonder and this is how your investments will outpace inflation. THE BEST PLACE TO PARTICIPATE: There are many, many, many ways to invest your money. Depending on your social status in life, you may be exposed to opportunities such as private equity funds, start-up companies needing capital, hedge funds, etc. Or for those of us less fortunate (or more fortunate), we may only have access to your run of the mill liquid investments such as stocks, bonds, and mutual funds or even less liquid investments such as real estate. Regardless, the question is the same for all of us: Where do we invest our money to give us the best shot at 1) Outpacing inflation and 2) Allowing our money to compound! Let us introduce you to the sometimes unglamorous and at other times very exciting stock market. A picture is worth a thousand words or in this case $10,000. As you can see, for every $1 invested in 1925, it is now worth over $10,000 if you 1) Invested in the stock market and 2) Kept it invested. So, if you are sold on keeping your money invested for a period of time, why in the world would you invest in anything not called the stock market? We might be hard headed at times, but there is no way anyone can look at this chart and not be crystal clear with where to invest their money. Yes, there will be and always will be the new investment du jour that promises great returns (and may even attain them) but we like what we see here and we will stick with it. HOW BEST TO PARTICIPATE IN THE STOCK MARKET: Investors have two main choices in their stock market participation. They can either buy an index fund (or funds) and own the stock market as a whole (i.e., you can buy the S&P 500 Index and you will get that return) or, an investor can invest in actively managed funds (or have their own stock portfolio). These types of funds or portfolio is centered on individual stock selection. For us, when at all possible, we want to craft a stock portfolio for our clients, rather than buy mutual funds (active or index). There are a number of reasons why, but the most glaring one is that a portfolio of individual stocks is the only way we can create a portfolio specific to a client’s needs. It gives us flexibility in managing a client’s savings allowing us to add a tremendous amount of value that you cannot get owning mutual funds. Mutual funds are designed to meet the needs of thousands of people at once. A stock portfolio is designed to meet your individual needs and then is managed to continue to meet your needs as we stay invested to exceed your long-term goals. AT THE CORE OF OUR TIME-TESTED PORTFOLIO MANAGEMENT APPROACH: Naturally, once you’ve made the commitment to invest in individual securities, you must have a solid approach to not only selecting investments but maybe more importantly, maintaining these investments (i.e., be steadfast in your original investment thesis when stock prices collapse). We know this through experience! Ever since we started investing in stocks via The Westmoreland Group (our original investment group formed in 1992), we have been implementing some form of our value-oriented approach to investment selection. Today, our approach is much more robust than 25 years ago (i.e., you learn a lot through experience), but still centered on the same philosophy of buying great companies at a fair price that we are happy to hold for a long period. For anyone who has sat and talked “shop” with us, you know we can go on for hours about investing. With that being said, below is a high level overview of how we find companies for our portfolio(s): · Thematic Investing: Most investments we make are predicated on a long-term thesis. We believe in a movement or culture change that will provide a growth opportunity for the foreseeable future. Then, we look for the companies that are best positioned to take advantage of this future growth. These themes / opportunities present themselves in different ways. Many times they are not really too clear at first glance and other times quite easy to see. For instance, a long standing theme we have is: You have to eat & drink. This is never going away, so we know if we find a food/beverage company that meets our investment criteria we may invest in them. And, in this case, the theme is far reaching, allowing us to find companies that don’t even make food items or beverages (i.e., We invest in a company that makes the kitchen equipment for most quick service restaurants), but we find them via this theme. In summary, we follow this approach as it’s a great way to find confidence in your investment selections. If we know a theme is solid and will be around for some time, we have a strong belief in our company companies long-term viability. Many times our thoughts on a company are contrarian to the market consensus, so this confidence is necessary in order to be successful long-term investors. · Qualitative & Quantitative Analysis: Once we’ve “discovered” a company that peeks our interest, we analyze it from two perspectives: 1) Qualitative and 2) Quantitative. The first focuses on all the attributes of the company that do not have a number directly associated with it. Sort of like intangible assets, something you can’t touch but know is necessary for a company to be a going concern…such as quality management, a product/service that is a necessity, or a clear roadmap of future growth. On the quantitative side, we look at peer numbers. Are the qualitative traits of the company leading to value adding financial performance? At the crux of this analysis is Economic Value Added (EVA). This is the ability of a company to produce a return on capital that is greater than its cost of capital. Lacking this trait, an entity at some point will cease to exist! Believe it or not, most companies do not achieve positive EVA. Combined, our qualitative and quantitative analysis produces a very short list of viable investments. At most, between the companies we already own and the ones we would like to own (i.e., buy when the price is right), we may find 100 companies. This is the result of a strenuous approach to find long-term investments. The hardest part about investing is trying to find the next investment, so you might as well put the time in to find the first investment so you can hold it forever. · Portfolio Management: The portfolio is the culmination of the above. If we are successful at selecting stocks, we can produce a portfolio that meets our main objective: capital growth. It’s that straightforward! Fortunately, we do not subscribe to all the “market jargon” nonsense regarding portfolio management. Terms such as “asset allocation” do not enter our realm. We are steadfast in our goal of growing our client’s capital (feel free to head back to the beginning of this “refresher” and re-read why we invest in the first place). The best way to achieve this is to invest in the best companies at good prices that will allow our money to grow over time. Putting 20% of your portfolio into the International Fund just because some asset allocation table tells you to do so under the premise of being “properly diversified” is ridiculous! Proper diversification can be achieved by investing in as few as 20 stocks in different industries. It is not necessary to invest in 100+ stocks across 10 different regions in 50 different industries, etc. Therefore, for us, we stick to what history has taught us (through our experience and market history) … it’s the companies that matter most. In our portfolio, we like to see no more than 40 securities (yes, this is greater than 20, but sometimes you hold stocks because selling them would be detrimental (i.e., taxes). And, if we have done our homework, we will hold these stocks for a long period, further enhancing the ability of this portfolio to meet your needs (i.e., lower trading costs if not making trades, no taxes, etc.). IN SUMMARY, As mentioned at the outset, we write this with the intention of giving you the clarity we have when investing. Regardless of the political climate, the economic stability (or instability), or the social injustices of the current times, our investment philosophy does not change. This writing is our ten-thousand-foot view of the why, how and what of investing. It’s easy to get caught up in the media hype, the water cooler chatter, your Facebook timeline, etc. but when you have a clear vision of your goal and how to achieve it, things tend to come into focus.