As you are well aware, we have witnessed some remarkably strong investment performance over the past three years in many of the balanced and equity portfolios from our select investment management companies.
Its important to take a deeper look at these strong levels of growth as well as to provide some context and re-frame our expectations for the years ahead.
First, its important to note that strong investment performance can result from a variety of different reasons, and often with complexities which go beyond the scope of this newsletter. I’ll go over a few of the more common reasons we see markets perform well and attempt to connect the dots on the logic behind them.
A period of strong growth may follow a period in which there was a market correction (or significant downturn). These downturns can arise as a result of anything such as being in an overpriced state to something as wild as a global economic downturn. Strong market performance in the time periods after a downturn is something which typically makes sense because often markets become oversold as investors push valuations below what might be deemed reasonable. Savvy portfolio managers use this opportunity to purchase investments at “fire sale prices”, thereby offering a tremendous growth opportunity when the general marketplace catches up. The year 2019 was just such a year, in which a strong growth period followed a market decline from the subsequent year. Again, in 2020, we saw a very strong market recovery after the initial shock at the onset of COVID. Time and again we see opportunities arise after periods of negativity, and the best portfolio managers are experts at using these to your advantage.
We may also see strong market performance when a there’s a combination of positive economic news and solid investor sentiment. For example, when manufacturing sectors are roaring with production, interest rates are low, supply chains are robust, unemployment rates are down, and the consumer is spending in a consistently strong fashion, we can then see some rationale for markets to perform well. Strong and diverse economic activity offers companies the opportunity for increased profit which often translates into higher share prices. In other words, when mankind is busy being productive and creative and there are no negative economic influences on the horizon, it can be a great time to see stronger than average growth in our portfolios.
t’s important to remember that we sometimes see strong performance of investment markets which does not appear to be tied to any sort of rational thought process. Greed, momentum investing, and overly positive investor psychology are very powerful forces which can shape the markets. These kinds of pressures often push markets to extremes which are not sustainable. It’s for this reason that we find strong confidence in portfolio management companies which specialize in a “value” approach to investing. You’ve heard us comment about this many times, but it’s important to refresh your understanding of this important portfolio management style. Firms which utilize this approach tend to be more conservative, as they are masters at purchasing investments at discounted prices while they simultaneously are looking to sell investments which they believe have risen near their intrinsic (fair market) value. We believe that this careful approach to portfolio management is what brings tremendous value (pun intended!!) to our clients during tumultuous times.
In wrapping up our discussion about strong investment performance, it’s important to understand that history often reverts to the “mean” (in other words, the middle). By this, I meant that periods of strong growth are often offset by periods of regression which are then re-balanced by periods of growth. The cycle repeats. We like to view these last three years of strong performance as a “down-payment for the future”. Years in which we have growth which exceeds our expectations helps to protect us for the inevitable years when the opposite occurs. Having said this, be clear that we are certainly not suggesting anyone should attempt to “time” the markets! Such an approach very often causes investors to lose money as it’s remarkably difficult to do successfully and repeatedly, hence our recommended use of portfolio managers who help protect us from unwise choices! These professionals are constantly looking to make investment decisions which are grounded in solid research, years of experience, and a true understanding of risk and reward. The markets are much more kind to those who adhere to a prudent and patient approach to their investment management.
History tends to repeat itself both positively and negatively, so we rely upon the experts to help us navigate these complex “investment waters” with success!