Just Hiking Thru
One of our esteemed colleagues, Scott Mauldin, recently committed to complete the Appalachian Trail. Our romantic, adventuresome self describes this six month journey as a destination while our pragmatic, “Uber” passenger self wonders how do you know when you are lost. All jokes aside, we applaud repairing to the woods to live deliberately and suck the marrow out of life to paraphrase Henry David Thoreau. We also agree with Thoreau’s mentor Emerson who said “Do not go where the path may lead, go instead where there is no path and leave a trail.” These simple, naturalistic concepts are central tenets to the art and science of investing, in our opinion.
For instance, hiking across several states with only a backpack, clothing and a map takes a deep understanding of the fundamentals of outdoor recreation. If you wander off the beaten path, you can find some breathtaking vistas but you can also never be heard from again. Not unlike a value manager who determines the value of a stock using fundamental training and establishes a position where others fear to tread. Oftentimes, one reaps generous rewards in this way, but make too many bad picks and investors will take a different journey. Of course, knowing when to abandon a seemingly wayward path is the hard part. Sometimes the next great surprise is just around the corner.
Another area emphasized by Hike-thru backpackers that parallels investing is the hiker’s gear. The weight of a hiker’s gear is similar to the expense ratios on funds or exchange-traded funds (ETF’s). Backpackers and by extension, returns, are held down by extraneous weights. Cutting extra weight, while still retaining the essentials is a matter of deep significance for someone in the woods for six months. In fact, one of the first stops on the Appalachian Trail, Mountain Crossings, has an almost cult-like following when it comes to their “shakedowns”, where they streamline backpacks and indentify problem areas for hikers before they get too deep into the trail. This approach is similar to the focus we have had for years with low expense mutual funds and exchange-traded funds. In fact, you could say that “shaking” down portfolios is something we do every day.
Finally, hiking alone in the woods is by definition a solitary pursuit requiring patience. Choosing to overweight financials like many of our managers did last year, or energy in 2015/16 and healthcare/biotech in late 2016 can be a lonely feeling while you wait for an upturn. Purchasing an asset with less perceived downside risk and higher upside potential while awaiting a momentum change is the mantra of many “value” investors. When Benjamin Graham (Warren Buffet’s mentor) was asked by the Chairman of the Senate Committee on Banking and Currency in 1955 to characterize when and how the momentum change occurs Graham responded “that is one of the mysteries of our business… We know from experience that eventually the market catches up with value. It realizes it one way or another.” Peter Cundiff, another famed value manager, took this thought process a step further by stating “The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not possess this characteristic.”
Keeping with the trail metaphor, a nice walk in the woods can turn ugly soon if conditions change. A sudden storm or a wild animal can wreak havoc on someone unprepared. With the price-to-sales ratio of the market at its second highest level in history and price-to-book ratio nearly 2 times the 2009 level, we are leery of “bears” lurking in the dark. Add other examples such as Tesla trading at a market capitalization higher than Ford, even though it delivered only 80,000 cars last year compared to 6.7 million by Ford, and we feel even more compelled to hew to the path carved by older hands that have traveled this trail many times. Several of our fundamentally driven managers are holding significant levels of cash, and we feel very certain they are doing this for a reason. Our strategy is to provide shelter during storms thereby recovering quicker than others. In financial terms, we call this minimizing downside risk.
In closing, please know that we support all who endeavor to carve their own path or march to the beat of a different drum. The wealth we create and maintain is hopefully a tool to help support or manifest destiny for generations to come. On that note, for those who wish to follow our dear friend, Scott Mauldin, on the Appalachian Trail, you can find him at http://www.trailjournals.com/entry.cfm?trailname=21046.
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The investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
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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