Q3 2020 Creative Newsletter

3rd Quarter 2021 AM Newsletter

October 18, 2021   ·   By   ·   Comments Off on 3rd Quarter 2021 AM Newsletter   ·   Posted in Q3 2020 Creative Newsletter

“Let’s Roll”

The terrorist attack on innocent Americans twenty years ago was one of the most gut-wrenching and disturbing moments in recent memory. One we still struggle to process completely, and we were not even in New York City or the Pentagon. Maybe it’s the full array of emotions or maybe it was the sheer audacity of the attack on our way of life? Who knows? What we do know is, there were bold acts of heroism on that day like Todd Beamer on United flight 93 that inspire us and rekindle our faith in mankind. When a young salesman can ascertain the United States is under attack and rally three of his fellow passengers to take down our enemies while reciting the Lord’s prayer with the 911 operator, one can certainly find hope. Call us simple, if you must, but heroism like Todd Beamers’ reinstills our confidence America can reunite and revive what has made this country a beacon for the world.

You might ask why we are referencing 9/11 besides the historical relevancy of it being twenty years ago? To this we would say, because it’s important to reflect upon history no matter how painful and difficult it may be. If we try to whitewash the past for fear it might offend, then we risk diluting the lesson. By the same token, if we don’t learn from the history of markets, then we are doomed to make the same painful mistakes over-and-over again. As we move away from 2000 to 2003, we forget during the “Dot-com” bubble of the 2000’s the Nasdaq composite of big, sexy tech stocks lost 78% of its value from top to bottom. Meanwhile, the value sector was down 13.48% and two of the value funds we use the AMG Yacktman Fund and American Century Equity Income were up 59.37% and 34.15%, respectively. As things like Dogecoin are up 4,000% plus year-to-date (down from earlier this year at 11,860%), it helps to have knowledge of the “Dot-com” Bubble, South Sea Bubble, Tulipmania, Nifty Fifty stocks, and the Housing Crisis to name a few. If not, we may not see the historical parallels or the level of risk, and not have the tools to navigate the future. For instance, currently the spread between the most expensive stocks and the cheapest stocks has only been wider in the year 2000. Perhaps more startling is the fact that, per Third Avenue Funds, there are currently 1.76 trillion worth of companies listed in the United States that have been unprofitable for the past five years consecutively, as measured by EBITDA. This same group of companies trade at greater than 11x revenue, and in 2020, produced an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin of negative 20%. Said another way, these companies, in aggregate, lost twenty cents on every dollar of revenue produced before capital expenditures. Evidence has historically shown that such huge distortions between the cheapest and most expensive parts of the market typically result in painful reversions to the mean.      

Do any of these numbers serve as definitive signs of an impending market correction? Sadly, “No”, as that would make life a lot easier. However, they do provide a good frame of reference that can mitigate risk for us all. Growth stocks may continue to outperform for years to come but the reason cheap stocks, typically called “value” stocks, have performed well in the past is because they have fundamental cash flow and low expectations. Growth stocks, on the other hand, oftentimes perform poorly in a rising interest rate environment because their promises of significant revenue growth do not lineup with their lofty valuations, high expectations, and minimal cash flow. All stock investments are essentially a claim on free cash flow, not a fluffy promise of growth.  To that end, cheap value stocks are viewed by many as a conservative investment in a market at risk from inflation and elevated prices. Other assets shown to historically perform well in frothy stock markets have been REITS, commodities, fixed income, and cash to name a few. However, all have an element of price and value to them that make them more effective during different time periods (price does matter). Suffice it to say, a diversified portfolio containing all of these elements to varying degrees, still remains one of the best ways to realize long term retirement goals, in our experience. Conversely, from our perspective, an overweight to highly speculative investments with little to no cash flow feels like an easy way to diminish one’s retirement goals.

We realize drawing historical parallels to the horrific images and memories of 9/11 and the stock market is a delicate balance, as managing wealth clearly pales in comparison to the events of that day and, frankly, we have not written about 9/11 much because of that very same sentiment. The heroism of firefighters running up the stairs of the World Trade Center and the passengers on United Flight 93 still moves one to tears twenty years later. The anger at the loss of life still chokes up grown men and women and stifles their ability to communicate effectively. We promise to never forget 9/11 and never forget the seriousness of our charge to faithfully manage your relationship against the backdrop of the greatest country in the world. To paraphrase Todd Beamer, Let’s continue to roll forward for many years to come with our historical knowledge tucked away and ready to handle any risks thrown our way. We remain your diligent advisors. Please call with questions.

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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck