Making sense from the noise
Increasing geopolitical risks are
having an impact on global output financially and investor anxiety
psychologically. And yet, the financial
markets are on a powerful run the breadth of which is essential to a post-Covid
sustainable recovery. So how does one
reconcile this parallel disconnect
between the two? Are we in a
“consolidation” or a “dip”, a “reversal” or a “pause”? Just how to define such things?
Firstly, it is imperative that no
matter the bias a strict methodology must be employed…..always!! In our case, we initiate our analysis with a
realistic quantitative assessment of all macro factors, economic, technical and
otherwise. At present we believe that
fundamentals are strong, getting stronger, and that despite pauses or
interruptions there are sustainable trends in which to invest. Next, we disqualify from inclusion any
business or company that doesn’t have a track record of earnings, earnings
acceleration over a three period (minimum), or stochastic outperformance within
their respective business sector. Over
the long term we have found these parameters to be the most helpful in reducing
excessive portfolio volatility caused by outside “noise”. In our current quarterly advisory equity
research, for example, there are more companies that fit these criteria
than in previous quarters over the last three years. Market breadth and sector diversification are
heightening our bullishness in the long term.
Further, we believe that these
qualifiers usually distill our analytics to the epitome of quality because they
identify businesses that focus upon their end user, their clients, first and
their shareholders second. This is not to diminish the significance of a profit
motive. Rather, the concept of building
a better mousetrap has always proven
to have financial sustainability. Our
focus upon consistency and longevity allows us to maximize the potential for
dividend expansion and capital gains.
As such, we are highly performance
and process oriented. Expressed another
way, the absence of significant drawdown in any portfolio management
discipline moderates the risks and magnifies the upside possibilities.
Let’s be specific
My readers also know that my
decades-long fervor for socially responsible businesses is crucial to our program. Despite many avoiding the topic
altogether….perhaps not to appear politically “soft” or “appeasing”…the public are now
reconsidering their previous avoidance and allocating a greater amount of time
and interest to numerous global crises.
As an investor, you can either be specific to the industry or companies
you research (i.e. water, energy, healthcare) or you can broaden the aperture
of your analysis to include what has become a comprehensive global tectonic
shift in problem-solving. In either
case, examining these topics is not only proving to be good citizenship but it
is also highly profitable in the long run…exactly the opposite of the parallel
disconnect referred to earlier.
Innovative application of science and
technology will cure diseases, create alternative energy, feed the hungry,
educate and include the disenfranchised, and break down impediments to creating
GDP where none existed or had lay stagnant for decades.
These facts, along with many other
factors, are the reason for our bullishness in the face of so much
pessimism. The potential for good far
outweighs the obstacles in place, politically or economically. As in sports, the “big Mo” (momentum) is the trend
most important to creating success…in this case, secular long-term capital
gains. Make the most of it while it’s
here.
No doubt, there will be headwinds and
other exogenous disturbances in the days and weeks ahead. Thus the reason for our admonition that all
money management begins with a methodology
is even more cause foe investors to use this time as a chance to reflect
not just upon the individual securities in their portfolio but upon the
aggregate of their asset allocation and its relevance to the risks of our time.
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