A Short Term Market Rainstorm

One of our favorite places in all the world to vacation is the Garden Island in Hawaii, Kauai. There is nothing better than hiking the famous Kalalau Trail that overlooks the famous the Nepali coast. It’s one of the most beautiful places we have been which keeps us going there over and over.

The one thing we’ve learned through our multiple trips is to prepare for anything. One minute the weather will be beautiful, the next minute you could be in the middle of a jungle rainstorm (they call it the Garden Island for a reason!).

A saying that we have come to know through our time there is “if you don’t like the weather, wait five minutes.” This is because the rain normally doesn’t last long before the beautiful weather comes again.

The stock market acts in a similar way.

As we enter 2016 it has been raining. The market has left some people to wonder, “am I going to lose money in 2016?”

Similar to the rainstorms in Kauai, the market does rain occasionally for a short period of time. Maybe even for a year or two (which in the markets time frame is a short period of time).

I recently talked to a client who’s account was down $10,000 during the August market pullback. Needless to say he was not happy about it. His fear was that his account would go to zero and never rebound. His fear, I suppose, could become reality if every stock went bankrupt which would be a highly unlikely outcome.

The interesting thing about his fear was that the markets rebounded 5.4% in October. The rain had stopped. Selling out of fear would have hurt him more than waiting out the rainstorm.

One of our favorite investors is Howard Marks. He runs one of the biggest debt firms in the world and is a fantastic investor. He discuss the difference between volatility (rain) and true risk. Paraphrasing Mr. Marks . . .

  • Volatility (rain) is the ups and downs of the markets. It’s a requirement that investors have to pay for the potential reward.
  • Risk is the permanent loss of capital. It’s selling assets because the fundamentals of a company have changed or the volatility is too much to stomach.

Currently portfolios are experiencing the volatility. The last thing we want to do is turn that volatility into risk.

Think about it this way. If you invested in a business, a business that you know very well. You trust management, you know the in’s and out’s of the business and know it’s true value. For example purposes let’s say the value of the company is $100,000 million.

Now let’s say that someone comes to you day after day wanting you to sell the company for $50,000 million. In fact that someone flashes all sorts of lights at you and goes on the news saying all sorts of things about your business trying to get you to sell.

What would you do?

It’s simple, you would wait for the buyer to realize the true value of the company. You would wait for them to buy the company at hopefully a lot more than $100,000 million before you sell. It might take a year or two or three for that buyer to realize it, but you would wait.

Right now that is what’s happening in the market. The market values some businesses that we have invested in to be worth a lot less than what they actually are. We don’t want to take the risk (permanent loss of capital) on those investments. That would hurt clients more than help. The key is ignoring the short term rain storm and waiting for the market to realize that the company is worth more than it’s value. That’s what a good business owner would do.

This week we will be mailing out quarterly statements to our clients. These quarterly statements are short term in nature. We explain and show the current market’s value of the businesses that our clients own. That’s the first number that you will look at. The key is understanding that it’s a short term view. We urge everyone to not get caught up in the short term market’s value of the assets. Focus on the long term. 

The other side to the rainstorm and to the market volatility is that it creates tremendous opportunities to buy some businesses at very cheap prices. There are many businesses who’s value is greater than the market currently says it is. We will be looking to buy those businesses knowing that in the next two to three years those business will be worth a lot more creating wealth for our clients.

Although the rainstorm gets in the way for the short term, it is necessary. Think of what Kauai would be like if there was no rain. It’s also true for the market. In order to see the green you have to experience a little bit of rain.



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