Investment Environment - Winter 2020
Let’s begin 2020 by observing that every long-term investor who has ever stuck to a plan and ignored the noise of current events and market ups-and-downs has been rewarded with spectacular growth in wealth. The terrific returns of 2019 help to reinforce our conviction that those who accept the volatility that comes with owning stocks always come out ahead in the long-run. The temptation to try to “time the market” is ever-present, self-defeating, and totally unnecessary. It makes perfect sense that those who own “shares” of the profits will eventually come out ahead.
The argument for lifelong investors to stick to a plan is further supported by the paradoxical relationship between stock market returns and economic news. 2018 was a banner year for corporate earnings and dividends, but the stock market ended the year with a 20% peak-to-trough decline that made a bottom on Christmas Eve. Meanwhile, in 2019, stock markets rallied mightily despite the fact that manufacturing went into decline and that the earnings of the S&P 500 declined slightly over the year. Nobody ever would have predicted this sequence of returns would coincide with this flow of news and financial statistics. When 2018’s overblown fears of trade wars, impending recession and impeachment did not materialize, the market in 2019 went up to new record highs. Investors who had sold stocks expecting a big drop were left on the outside looking in. It simply does not pay to try to time the sequence of market returns.
Our work instead is to build and manage an arrangement of securities that allows us to face the uncertain risks and opportunities in front of us. Securities analysis is at the core of this work. It is more important than ever to find value in our new investments and to create meaningful diversification in our investment mix. When special situations arise that cause an individual stock to fall in price, I am always looking carefully to see if those circumstances may be temporary. It was with this mindset that I added shares of SNC-Lavalin to all client portfolios on December 5th. My contacts at Veritas Investment Research had thoroughly scrutinized the company’s financial statements and estimated an intrinsic value much higher than the $24 price of the shares. We all agreed that the company’s political problems would sort themselves out sooner or later. The Liberal government had won the October election, we reasoned, and Quebec’s Caisse pension fund remained the largest SNC shareholder. Two weeks later, on December 18th, SNC-Lavalin Group announced a settlement of federal charges arising from legacy activities in Libya, causing the stock to rise by 30%. Absolutely none of our resulting gains are attributable to market timing!
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager