September 2015

“If you can’t sell what you want to sell, you sell what you can, including your grandmother’s necklace.”

– Art Cashin, CNBC commentator on the 1,000 drop on the Dow Jones Industrial Average on Sept. 4, 2015.

When financial panic looms, it is common for investors to look for anything to sell, even if it is something treasured. Ownership in a financially strong and stable company can be a treasure. For this reason, seasoned investors understand that when financial markets are volatile, it is not usually the best time to turn everything to cash, instead it is usually an opportunity to trust the process and stay the course or potentially invest more at favorable valuations. 

If you occasionally tune in to CNBC, then you have likely seen Art Cashin, who has been trading on the floor of the NYSE for nearly 50 years.  He has literally seen it all. In his early days, the percentage spreads between what a buyer would pay for a stock and what a seller asked, were a quarter point or more. Real people would painstakingly match buyers and sellers as fast as humanly possible. Orders were phoned in to the trading floor of the NYSE. The settlement of a trade was five days or more and there were no trades that went untouched by human hands.

Today, Art Cashin lives in a totally transformed environment. Technology has driven extraordinary share volume through computer algorithms and high frequency trading. Transactions that used to take minutes to complete are now done in nanoseconds. Many say the system is stacked against the "little guy" and some fear that individual investors can no longer compete “against the machines.” The speed and volume of transactions are enough to create fear in even the most savvy investors.

Add to the scenario the recent volatility in August and September of this year. We saw record down days, followed by record up days on huge trading volume. Stock prices on some large companies moved down and up over 10% in two days on no specific news that should have whipsawed the market value of some of the world’s largest corporations by billions of dollars.  While times like this are unnerving, it is important to stay focused on our long-term investment strategy.

How do you know which investments are treasures? First and foremost, when a trade is executed in a specific stock, you have just taken ownership in that company. You cast a "vote" at that point in time that the shares were worth what you paid. Going forward, others (including high frequency trading computers) are casting their votes on the market value of your company. It is also the instant when smart investors should continue to concentrate on the intrinsic value of what they own. You are an equity holder in their future, and as such, you hold rights to a little corner of their balance sheet and a small portion of their earnings.

If you know and believe in what you own, you are far less affected by program traders and others trying to buy at a discount from you in an emotional market. You are much more able to sell (or buy more) on your terms. Thinking about what we do as owning companies, and not trading stocks, helps us to avoid irrational days in the market. It also helps when our “irrational nature” tugs at us to sell low and buy high, versus the contrary.

At Talbot Financial, we currently favor portfolios of stocks concentrated in very large global companies across several diverse industries. These companies share many similar characteristics, including: products in demand by consumers and businesses, strong balance sheets, sustainable sources of earnings growth, attractive dividends and highly capable leadership.

You might be wondering—are individual stocks the best way to invest. We think so. Unlike investing in mutual funds and Exchange Traded Funds (ETFs), there are no barriers between you and your direct ownership is these companies. Additionally, by owning shares directly rather than through shares of funds, you avoid increased volatility related to swings in cash flows, additional fund fees , lack of transparency and investment behaviors of the other fund shareholders. An increasing amount of evidence is mounting that ETFs might not be the holy grail of low-cost investing, including a recent article in the Wall Street Journal, Wild Trading Exposed Flaws in ETFs (Sept. 14, 2015), which underscores the various risks associated with not understanding exactly what you own. According to J.P. Morgan Asset Management, the ratio of ETF to common stock selling was 45 to 1 in the recent correction. This is a prime example of how market volatility may create more irrational selling in ETFs, compared to investors owning shares of individual companies.

While investing in mutual funds and ETFs is one avenue of investing, we prefer to find the hidden treasures in companies where we can carefully analyze financial statements, assess prospects for continued growth and understand the strategic direction of management.  

As Art Cashin reminds us: “If you can’t sell what you want to sell, you sell what you can, including your grandmother’s necklace.” When the market fluctuates as it did in the volatile down-swing last month, take comfort knowing that we feel confident in our ownership of some of America’s greatest companies and we will work hard to help you keep grandma’s necklace in the family.


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