Patience Isn’t a Virtue, It’s a Necessity

With the increased fluctuations and heightened volatility we have experienced in the markets in the past several months, I would like to share my thoughts and perspective.

I feel the most important point I would like to state is: short-term volatility is normal. We will look at some statistics shortly, but first I desire to express that volatility is to be expected. We do not let volatility sway our opinion of the investments we own.

Our investment strategy is to identify great companies, buy them at reasonable prices and receive an increasing flow of income in the form of growing dividends. We believe this is the best manor to invest successfully over the long haul.

As in all investing, patience is more than a virtue, it is a necessity.

Warren Buffet has said: “The first casualty of emotion is reason”. And: “When markets correct, stay invested and go shopping”.

Remember the “Blue Light Specials” at Kmart (I am dating myself)? A little portable platform with a blue light positioned 10 feet in the air and an announcement to “Attention, all Kmart Shoppers” of a special sales going on in aisle 8. This sale would only be available for a short period of time. People would rush over to buy good products at even greater discounted prices. Is this what Mr. Buffett is referencing in his “go shopping” comment?

Don’t view your stock positions as ticker symbols. They are companies that offer real products and services that bring real value to their clientele and real profits to the company, which are then, shared with the owners of the company- namely you, in the form of dividends. Remember that dividends are not determined by stock price, the movement of the markets, nor volatility in the markets. Dividends are based on the profitability of the company with the exact dividend distribution amount determined by the board of directors. Dividends are driven by profits and absolutely not by the movement, up or down of the stock’s price.

The past couple years we have been in a historically low period of volatility…until February 1^st of this year. What we have experienced since then is actually quite normal or common. Going back to 1980, the average intra-year correction is about -14%. This is what we should expect, this is normal, this is not unusual. And to quote one of my favorite financial authors: “And this too shall pass”. This is not a naive, “pie-in-the-sky, “stick your head in the sand” approach to dealing with market volatility, it is the reality of the long- term historical behavior of the markets. Disruptions happens, these sell-offs are only temporary interruptions of the long-term market trend of appreciation.

The S&P 500’s intra-year drawdown vs. the year-end value over the past 7 years is indicative of normal volatility:

2010 -16%, +13%, a swing of 29%

2011 -19%, essentially flat, a swing of 19%

2012 -10%, +13%, a swing of 23%

2013 -6%, +30%, a swing of 36%

2014 -7%, +11%, a swing of 18%

2015 -12%, -1%, a swing of 11%

2016 -11%, +10%, a swing of 21%

2017 -3%, +19%, a swing of 22%

Source: JP Morgan Guide to the Markets, 4^th Quarter 2017

Over that 7 year time frame, there was an average correction of negative 12%, with an average year-end return of over 13%.

First quarter 2018 earnings season has just concluded. The S&P 500 earnings increased 26% year-over-year, well above the 18.5% estimate on April 1, boosted by the new tax law. Revenue increased 8.2% year-over-year growth, above the prior 7.3% estimate. Guidance has been supportive amid a solid economic growth outlook and drop in the U.S. dollar. Forward four quarter estimates have risen impressively by 1.3% during earnings season. There is much to be optimistic about going forward.

So as we all experience heightened levels of volatility going forward, remember that when it comes to investing, patience isn’t just a virtue, it is a necessity.

If you have any questions, or would like to discuss our Investment Strategy or anything financial, please do not hesitate to contact me.