During the week after the Trump Administration enacted punishing cross border tariffs on “Liberation Day” (April 2nd), broad equity markets experienced sharp declines. It was another market calamity. Or was it? Within three months, a market rally ensued, erasing all year-to-date losses and driving capital markets to all-time highs. This was not the first time markets overreacted to events, nor will it be the last, leaving investors to ponder how to deal with sudden, often violent price declines. In this edition of The Journal, we offer a Coleford perspective.
A long history of temporary devastation
First the facts. Over the past 25 years, markets have been challenged repeatedly, in some cases by devastating events including the terrorist attacks on 9/11 and the global pandemic. Other events were economic, or business driven including the end of the dot.com era, the beginning of the 2008 financial crisis and the 2011 EU debt crisis (Greece bailout). In every case, markets dropped on the news – and associated worst-case scenario assumptions – only to recover.
Not to diminish but to commit
As wealth managers, we would never ignore or downplay the cost of calamities, nor would we blithely conclude that every event will quicky sort itself in the minds of capital market participants. On the contrary, we prepare for these eventualities by committing to investments that are best able to perform over the long term, through market cycles. In this way, we do not “time-the-market”, we let the advantage of “time-in-the-market” compound returns. Because we prepare for the downside, we can take market corrections in stride and stay invested. Coleford’s results over these past 25 years validate this approach.
We own investments that let us sleep comfortably every night
We choose companies that have structural advantages such as brand power, scale, low input costs, and barriers – often regulatory in nature – that make it difficult for competitors to gain a foothold. We screen for these and other unique characteristics including a strong balance sheet, proven record of delivering superior return on capital, and consistent commitment to shareholder value creation. There is substantial upside to owning these types of businesses over the long term in the form of company share buybacks, capital gains, and dividends. Additionally, the size, scale and fundamental advantages of these selected businesses make their performance far more predictable than companies that lack these qualities and characteristics.
Volatility is the price we pay for long-term participation
All stocks exhibit volatility, some far more than others, but over the past 25, 50 and 100 years, equities (common stock ownership) have always outperformed fixed-income securities, over longer periods of time. This makes equities the preferred choice of long-term wealth creation. As noted, Coleford owns structurally advantaged companies, not because they are immune from share price declines at the onset of unfavourable economic/political news, but because the history of ownership shows that such businesses incur shallower and shorter declines. This removes the human tendency of overreacting to a negative market event by selling in a declining market, which can permanently impair invested capital. More strength and predictability in business performance means less share-price volatility over time.
Financial planning and smart diversification take the edge off market dramas
A personal financial plan that defines your objectives (including short-term requirements for income and long-term demands for capital appreciation), the time horizon available to meet them and your tolerance for risk is invaluable. For many clients, the mere act of planning is cathartic because it offers a form of control over one’s financial destiny in an otherwise unpredictable world. Coleford plans also prescribe the asset mix we follow over time in achieving your goals. Diversification through ownership of a basket of structurally advantaged companies paired with fixed-income securities (if required) provides further downside protection and stabilizes long-term results.
Since there is no denying the inevitability of market-shaking events, it’s best – in our view – to own and patiently hold investments that are powerful enough to not only withstand buffeting winds but to deliver meaningful shareholder value in the aftermath.
Staying the course
Panic doesn’t often seize the investing public as suddenly as it did the first week of April, nor vanish as suddenly as it did. Still, this episode can and should serve as a kind of tutorial. Its lesson: investors succeed over time by continuously working their plan regardless of the current “crisis”. Please contact us if you would like to discuss planning and investing in a turbulent world.