Good afternoon,

The news cycle is dominated by short-term happenings in a complicated world where things change and new concerns pop up on a daily basis. A month ago it was GameStop and short selling. Last week, it was that interest rates have moved up over the past six months and with that comes expectations by some of potential inflation pressures as the economy recovers from the pandemic weakness.

This has started a pullback that is affecting more stocks on a daily basis. It is a challenging time for investors who may own some of these issues. In many cases, the darlings of last year.

Names like Tesla, down 30% in one month, Apple, down 11.3% in one month, Costco, down 12% in one month and Shopify, down 17% in one month. Thankfully, some of the companies that hadn’t done much last year are picking up the slack and counterbalancing this trend. Companies such as Manulife, Canadian Natural Resources and TD Bank for instance.

This is the very reason I believe in diversification. I have no idea which stocks will go up in the next few months and which stocks will disappoint. In fact, Richard Bernstein Advisors (a US firm) calculated the probability that the S&P 500 will go up for any period of time the following way:

As you can clearly see, on any giving day, it’s a coin toss. Even for a full year, it’s only 2/3 certain that the S&P 500 would be up and that is for the full market. On an individual stock basis, the numbers are probably even more uncertain. 

What is certain is that in the longer-term, the stock market has been one of the very best places for creating and growing wealth over a very long period of time.

Take for one moment the Dow Jones Industrial Average index (it was for a long period of time the premier index for the US stock market, hence we’ll use it here as a proxy). The DOW crossed meaningfully the 1000 point mark in November of 1982. It closed the year in 2020 at 30,606. That’s a total of 2844.97% for the period or compounding at 9.28% per annum.

That is for the market alone.

For companies, the individual stocks we buy, we must remember that today’s price should reflect the present value of future cash-flows. A fancy way of reminding ourselves of the axiom, price is what you pay but value is what you get. In other words, good businesses and their stock prices are two very different things.

Take Microsoft (which we own) and Cisco (which we don’t) for example. Two companies that reached record stock prices in 2000. In the following decade, they both grew to be much bigger. But from 2000 to 2010, their stock price fell by +/-50%. In fact, Cisco has still not reached their peak of March 2000, twenty odd years later. 

This brings me back to today’s darlings. As I said earlier, it’s a challenging time in which investors, who may own some of the issues that have gone up tremendously over the past twelve months, are dealing with the decision of whether to take profits now or hold to see how far down a correction may take a stock.

Some but not all, of the present darlings will still be in business in a decade. Most likely Tesla and Shopify to take two easy examples. But what will their stock price have delivered over that same period of time? At some point, the price of some of these names have gotten divorced from their fundamentals.  

So I hope you won’t mind but I’ll stick to a few boring criteria when investing your money. Sales, profits, competitive moat, financial strength and valuation. They matter, so we’ll stick to them. When the market presents us with a buying opportunity, we’ll take it. Costco is a prime example right now.

That’s it for me today, part 2 later this week.