Investment Climate Oct 2019: Good businesses are resilient

The investment climate in the third quarter of 2019 was marked by significant volatility but little net progress in overall market averages driven by an economy showing signs of slowing down.  The result was that the average large stock moved a little higher, small stock averages were a little lower, and interest rates continued to slide giving bond prices the biggest boost of all major asset classes.  Thus, none of the net changes in asset prices for the quarter caused much change in the above-average returns that stock and bond markets have experienced so far in 2019.  Our own growth portfolios were generally weaker in the third quarter, yet still maintained their market-beating returns for the year while income-oriented portfolios grew at faster paces than average. 


We expect this “correction” in growth company prices may continue, as we navigate the historically weak fall season, before resuming strong performance as more clarity on trade issues and the economy comes into view.


We are witnessing an abundance of consternation regarding the state of the economy.  Will the trade war with China finally derail the long economic cycle that has persisted since the 2008-2009 financial crisis and accelerated in the last few years?  Is yet another “inversion” in the yield curve (long-term interest rates lower than short term interest rates) a sign that we are headed for recession?  Is the toxic political climate going to make it impossible to get the myriad issues that face the country addressed by government (healthcare, tax simplification, immigration, homeless and vagrancy in many large U.S. cities)? 


These are very real issues that need to be addressed at some point.  But the constant drumbeat from the “crisis industry” (otherwise known as the media) appears to us to be missing the resiliency of the business community, particularly in the U.S., but also in some other parts of the world, too.  It never ceases to amaze us how the saying our mentor, Dick Taylor, often expressed: “we get by in spite” is so simple yet also so poignant!  It underscores that in the real world, outside of what is portrayed every second of every day in the news media, people keep working, creating, innovating, managing their businesses and providing for their families in a way that keeps moving us forward. 


This is not to say there are never setbacks -- there are.  And they are rarely ever obvious before they happen.  This is why we adhere to another saying that came from Dick Taylor’s own mentor, Thomas Rowe Price: “the great fortunes in this country were made by men who owned well-managed businesses in front of fertile fields of future growth, through multiple market and economic cycles.”  We are constantly repeating this, and we will continue to do so.  This is because we have seen it work very well for our clients over many years.


Currently, the “fertile fields” we are focusing on are largely in technology companies that are “virtualizing” those tasks which used to be done with hardware; building microchips that allow for much longer battery life; creating and allowing us to experience virtual and augmented reality; and using new methods to secure networks from cyber-attacks.  Distributed-ledger computing and blockchain are still emerging but we believe these technologies also promise to transform computing in the coming decade.


Fertile fields are also found in medical technology where new ways of discovering drugs utilizing artificial intelligence, genomics, and re-programming DNA are driving great progress in treatment of diseases.  And they are in medical device breakthroughs in the treatment of cancer and eye diseases. 


New business processes are driving innovation as well, whether it be more productive manufacturing methods based on nanotechnology, digital textile printing or advanced machine learning tools that provide businesses with levels of situational awareness that improve productivity and, ultimately, profitability.  Financial technology is transforming the way people save, invest and make payments. 


There is always uncertainty in the world, financial and otherwise.  The current climate is no different than ever before, although it may seem more upside-down at times.  Nonetheless, sticking to these tried, true and simple investing rules makes for the most assured way to invest hard-earned money we have ever seen in our six decades of professional investing.  Stay tuned.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Planet MicroCap interviews our CIO, Gerry Frigon, on Growth Stock Investing

Our CIO, Gerry Frigon, was recently interviewed by Robert Kraft of the Planet Microcap Podcast.

Gerry discusses the history of Taylor Frigon as well as the market, economy and investing in growth companies.  You can access the interview here.

More Reasons To Correct

The market actually was given two reasons to sell off this last week, the Fed's weak performance with last weeks interest rate cut, and President Trump's escalation of the Chinese trade war (and China's response in allowing the RMB to break below the psychologically significant 7RMB-to-the-dollar level).  As today's (Monday August 5th, 2019) markets more than exemplified, at least a mini "hissy fit" has begun.

We can't say that it's all that surprising to get a correction in stock prices here, as the market has been driving forward with quite a bit of strength since the beginning of 2019.  However, it's never fun to watch the force of sharp market corrections (3 and 4% down in a single session seems more and more commonplace).  That said, it was not all that long ago (4th quarter 2018) that the market experienced similar -- and worse -- down days and we have certainly survived; we will survive this one too (as all those before!).

Now for a quick comment on the two "reasons" for the selloff, cited above.

We believe the Fed displayed weakness in its statements after the meeting in which they decided to lower the target rate for Federal Funds by a quarter of a percentage point.  Chairman Jerome Powell seemed to struggle to justify the rate drop, suggesting it was a "mid-cycle adjustment."  Huh?  Yeah, that type of weak statement doesn't go far to assuage the manic traders who stake their financial lives on every breath taken by the Fed Chairman.

We are on record that despite what Donald Trump wants (have you ever known a real estate guy that doesn't want lower rates?) interest rates do not need to be lowered.  In fact, as virtually every economic data point of late has indicated, the economy is doing just fine, and we believe much of the weakness the economy experienced in the wake of the 2008 - 2009 financial crisis was exacerbated by zero percent interest rates for far too long.

As for the trade war with China, we want completely free trade.  No tariffs anywhere, levied by anyone!  We also know that is wishful thinking.

For most of our careers (now in the fourth decade for the oldest of us at Taylor Frigon Capital), we have believed two wrongs don't make a right.  In other words, it was for the better of all concerned that even if the Chinese government wanted to charge tariffs on goods coming into China, raising prices on goods for their own consumers, or otherwise forcing them to buy inferior products, it was their prerogative, and the US should not follow suit and do the same to its own consumers.  It certainly benefitted US consumers and businesses and aided growth in the global economy, (especially in the developed world, China being the largest developing country at the time). No doubt there were geopolitical benefits as well.

That said, there were other costs absorbed by the US which were not as visible.  Particularly rust belt manufacturing companies and their workers took a major hit (folks are not so worried about the cost of consumer products when they don't have a job).  Additionally, the theft of intellectual property (IP) in China has been rampant.  Certainly, technology firms would fare better if they could sell software under terms similar to the western world and not worry about seeing bootleg copies on the shelf in Chinese stores; that's just one of the many IP-theft issues.

We think that what this trade battle is really about is asking China to step into the first world.  They are not an emerging economy any longer and while it may have been prudent to "look the other way" in the interest of geopolitics, global economic growth or whatever, the time has come to demand adherence to the rule of law.

Many of our colleagues who equally tout "free enterprise" and a loathing for tariffs are staying "pure" to the doctrine of free trade, even if it is "one-sided."  We thoroughly understand that and respect it.  However, we think the view we are taking now is worthy of consideration, and may be the correct course of action in what is a very complex topic.

Regardless, we think these trade issues will ultimately be resolved, as it is not in either party's best interest to have them linger on.  It should also be understood that the amount of goods subject to trade tariffs that Trump recently announced would take effect 9/1/2019 is 10% on $300BB in goods.  This in an almost-$21 Trillion economy in the US, is minuscule, so some perspective is in order.

Meanwhile, what is far more important is the health of the companies in our portfolios, and on that front, in large part, the second quarter earnings reports for our companies are confirming that things are going quite well for our businesses.  We will continue to monitor that constantly, as always.  

Stay tuned.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Investment Climate July 2019

The following Investment Climate was published on our website on July 16, 2019.

Despite a brief correction in May, the general trend in stock prices since the beginning of the year has been decidedly upward.  Our growth portfolios have continued their relative outperformance. 

While we are quite pleased with these recent outcomes, we continue to be impressed with the prospects for the future of our portfolio companies.  It is noteworthy that our portfolio has had more turnover in the last couple of years than in the previous twenty as there comes a time when prudence takes precedence and it is necessary to position for the next great narratives, themes and theses.  We have been doing that fervently of late and are confident that we are in front of significant opportunities in areas such as medical technology, distributed ledger computing, security, manufacturing processes, ultra-low power sensor processing, omni-channel retail, augmented/virtual reality, computer graphics rendering, 5G edge computing, financial technology and enterprise software,  just to name a few.

  

We are often asked about what we think could derail the current favorable market conditions.  We would start by saying that while conditions have improved significantly in the last couple of years (lower regulation and corporate tax rates), conditions are still not ideal.  If we were granted all of our wishes, what would that look like? 

Here goes:

• A low, flat tax rate across ALL forms of income and all entities, individual and business, with an inflation adjustment for capital gains.
• A repeal of Sarbanes-Oxley, Dodd-Frank, Regulation FD, and streamlining the process it takes for a company to go public.  These regulations were all put in place with the best of intentions, to stop fraudulent activity in the financial markets.  But fraud was illegal before all of these rules were put in place, and it is still illegal today.  Perhaps if regulators spent their time finding and prosecuting fraud instead of forcing the 99.9% of honest people working in the financial industry to comply with all these rules and regulations, there wouldn’t be a need for them.
• Less government spending.  The amount of money the government spends is staggering.  Regardless of the department (Defense or any other), the government is simply too large and drains resources from the productive economy.  We don’t fixate on deficits, per se, but the pure size of government results in dollars being allocated too often to unproductive endeavors.  That needs to stop.
• A gold standard.  That’s right, dust it off and bring it back!  The Federal Reserve does not cause economic growth.  But it sure can keep it from happening.  And it is simply too powerful with its dual mandate of price stability and full employment.  Price stability?  Just look at a long-term chart of the value of the U.S. Dollar and let’s talk about price stability!  We have long advocated that the dollar should not be strong or weak, but STABLE.  We want our businesses to not have to worry about what the value of the dollar is going to be in the course of their business activities.  The Fed is in the news quite a bit lately with the talk of them lowering rates.  We tend to think that they probably don’t need to lower rates but that is not really the important issue.  Rates could be appropriately much lower, and with a continued upward slope to the yield curve (short term rates lower than longer term rates) if there was true price stability.  The only reason this rate discussion happens is because the Fed “manipulates” those rates, and therefore the dollar.  If you don’t think we are right, just look at a chart of interest rates for the first 150 years of the existence of the USA.

Okay, we’re done.

And we emphasize that we don’t think any of this is going to happen; but if it did, we would see an almost immediate, and probably significant, revaluing of the prices for our businesses upwards.

That said, we continue to heed the word of our mentor, Dick Taylor, who would say: “We get by in spite.”  We won’t let “perfect” get in the way of “good enough.”

Have a great summer!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Steve Forbes Interviews George Gilder on Current Issues

Recently, Steve Forbes interviewed our long time friend and partner in venture capital, George Gilder.  In this podcast on Steve Forbes' "What's Ahead" series of podcasts, Steve addresses some pertinent topics regarding trade and the economy, which are definitely worth noting, before he delves into his interview.

In this interview, Forbes asks Gilder about some very important topics relating to his recent book "Life After Google".  George explains why he thinks we are due for a change in computing architecture from the centralized and controlling world of Google to a new paradigm ushered in by distributed ledger computing and blockchain. This new paradigm will restore the power to the innovator, the entrepreneur and dampen the influence of the powerful "cloud titans,"like Google.

For our investors, this concept is not new as we have been discussing this impending shift for the last couple of years.  Nonetheless, we think it is crucial for these new ideas to be referred to regularly and understood completely as we transition from the centralized cloud to a more secure, less intrusive distributed architecture.

An important offshoot of this is to understand how such currently buzz-worthy concepts like "artificial intelligence" (AI) play into this shifting landscape.  As George so adeptly points out "faster is not better".  The World Wide Web with its vast and power-hungry data centers are "not even close to replicating the human brain", like those "clowns in Silicon Valley who think they are duplicating our 14 watt, zettabyte brain...with their tinker-toys based on AI".  Gilder pleads "that is speed of processing, and has nothing to do with consciousness or intelligence or creativity or any of the features that our brain shows...imagination, for example". As professional investors navigating in a world where investing in many circles has become nothing more than an algorithm, we couldn't agree with George more fervently.

Gilder continues, the "AI-cures-all" mentality assumes the entrepreneur is easily replicated "chemically" and is made up of "material forces" instead of a brilliant and intricately created form that itself is creative in ways that "always come as a surprise".  From this we can ascertain how Gilder relates the new paradigm to a reconfirmation of entrepreneurial capitalism, or as we much prefer to describe it, free enterprise.  It has become popular today to suggest that everything is a "zero sum game", that nothing is really created but simply shuffled around from one to another; the ultimate "trading scheme", if you will.  These ideas are part of what has given rise to the recently revived fascination with socialism, the failed economic model resulting in pain and misery everywhere it has been tried throughout history, and even today (Venezuela and Cuba, for example).

Regarding how the new paradigm relates to capitalism, Gilder says "growth is learning" and if the promise of AI were to be thoroughly true, then creativity and knowledge would be able to be planned.  It cannot. If it could, then socialism would work, and it does not.  Here, Gilder is echoing themes from his other recent book "Knowledge & Power" and its predecessor "Wealth & Poverty"; both books are also "must-reads".

It strikes us as frightening that George says he recently was in China and was warmly received at colleges and universities in that country when speaking in these terms, and yet he says he is "not ever invited" to universities in the United States.  China is still a communist country.  However, it is ironic   that the Chinese people seem to be much more receptive of these capitalist concepts (likely because they understand the problems of communism).  "Life After Google" is selling like crazy there.

George also touches on the problems with government subsidizing higher education as well as the folly of fixating on "trade gaps".  But as confirmation of our long-expressed concern over the "8000 to 4000 problem" (the number of public companies has been cut in half in recent years), George talks about the much smaller number of public companies we have today, compared to where we were at the beginning of the 21st century, and the "serious problem" that this creates.  Simply put, besides the obvious lack of new investment opportunities in public companies, the smaller number of companies going public has real ramifications for the economy and job creations.  Simply put, it acts as a drag on both.  Agreeing with our view about the reasons for this phenomenon, Gilder rails against the over-regulation and burdensome requirements companies must adhere to in order to be public, not to mention the cost of complying.

Overall, and as usual, George Gilder further solidifies his place in history as one of the most forward-thinking and gifted commentators on all things technology and economics.  We are honored to call him a friend and colleague and recommend all investors explore his vast writings.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Death and Taxes - Capital Gains Version

Inevitably, while we are definitely long term investors, there comes a time when we deem it appropriate to sell companies that have done extraordinarily well for us over many years (even decades in some instances).  We painstakingly consider the ramifications of these actions as it relates to capital gains taxes for those who own these companies in taxable accounts.  While the long term capital gains tax rate for federal income taxes is preferential to income taxes (20% for most investors), in high tax states like California where capital gains taxes are taxed at the same rate as income, the bite that the government takes is significant (13.3% at the highest rate, which is most of our clients).  Add in the Obamacare surtax on capital gains which most of our clients are subject to as well (additional 3.8% on capital gains) and the damage is simply painful.

Nonetheless, as they say: "death and taxes"... the only certainties in life!

This is where we cue our long standing response to the concerns about capital gains taxes: "Write your congressman"!  And while we definitely think each client subjected to such taxation should regularly complain to their representatives in Congress about how poorly they appropriate our money, we understand that seems to fall on deaf ears these days; especially in California!

All that aside, we emphasize that we absolutely MUST consider the investment merits of our decisions first and foremost, and relegate tax-related decisions to second place.

We use tactics throughout the years to minimize capital gains taxes by harvesting losses when and where we deem it appropriate, from an investment standpoint.  Most of the time that involves buying more of a loss position, waiting 31 days (so as to avoid wash sale rules) and then selling the original shares that were purchased at higher prices and carry losses.  Not surprisingly, oftentimes that results in losses being completely wiped out (buying low...!), but who's complaining if that is the outcome?  It is an effective tactic for realizing losses while still maintaining a position in a company that we believe to be temporarily impaired.

Additionally, when considering tax-loss harvesting, we almost never wait until the end of the year to practice such maneuvers.  It is then that most novices are taking tax losses, and we would much rather be in the position of buying those shares from people that are making poor investment decisions to save on taxes.  In our experience, those folks are usually falling into the "penny-wise and pound-foolish" trap.

One of the concerns that investors have is that they often don't know where they stand throughout the year with respect to realized capital gains and can end up in tax penalty situations for lack of withholding in the tax year.  Here, we note that every custodian we work with provides that information, generally on the front page of the statements, each and every month of the year.  We urge clients who have that concern that they monitor those monthly statements, or even have their tax advisers do so on a periodic basis throughout the year.  However, it is important to note that those realized gains/losses can change rapidly throughout the course of the year as conditions on the investment side of the equation (the most important side) change.

We have been most fortunate to have the types of above average returns for our investors that have created such problems as capital gains tax liabilities.  While we wish the government were more frugal and less willing to confiscate our money that we first earned, and pad taxes, and the risked, made money, and paid taxes, we are not holding our breath.  Long-time readers of our writings know that we believe the economy would be much stronger if the government didn't spend money at the frenetic pace that it does, but we get by in spite of such profligacy, and will continue to do so!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

The Fixation on Debt

For years we have addressed the issue of debt for our investors.  It seems there are very few issues that strike fear in the hearts of investors like that of debt.  Whether the debt be personal, corporate or government, very often it is used by the crisis industry (otherwise known as media) to make even the most savvy investors shake in their boots!

First Trust's Brian Wesbury has, over the years, been a voice with which we agree on most topics.  We urge investors to listen to his latest video in which he uses very plain language to put the "debt issue" into context.  

Simply put, it is the productive economy, the income it generates and the assets it holds that must be looked at when determining whether or not debt levels are concerning.  We would narrow it down even further and simply suggest the most important issue concerning debt is that it be used for productive purposes.  Since the U.S. is one of the most productive economies in the history of the world, that alone is enough to make us less concerned about debt.

Should we completely ignore it?  Absolutely not!  Should we lose sleep over it?  Not a chance, as long as the ratios continue at the levels they currently stand.  $22 Trillion in debt versus $300 Trillion in assets is workable!

Investment Climate Jan 2019: The Very Strange Correction

What a difference one quarter makes!  In our last Investment Climate (October 2018), we wrote that we “…certainly expected a sizeable correction in the markets…”.  Lo and behold, we got one!  Now in our fourth decade of professionally managing portfolios and having been through corrections and bear markets many times over those decades (1987, 1991, 1994, 1998, 2001-2, 2008-9, just to name the big ones), we can safely say this was one of the strangest.  As broad-based and strong of a rally as we saw in the first nine months of 2018, we saw an equally broad-based sell-off that began in September and continued on through Christmas Eve day, culminating in the worst Christmas Eve stock market performance ever, and ultimately, the worst December performance since 1931. 

One would think that something big like world war, world-wide famine, massive weather events across the globe, or a global disease plague had engulfed all the nations of the world, all at the same time. Nothing of the sort occurred.  Instead, the Federal Reserve raised the Federal Funds target rate from a range of 2.00%-to-2.25% to 2.25%-to-2.50%, the third quarter earnings season was solid against increasingly difficult previous-year comparisons, and the fear of higher tariffs on imported Chinese goods were considered the culprits.  Along with the “mania” fabricated by the media over these issues and a solid dose of ever-increasing “algorithmic trading” (computers trading instead of humans), the markets just plain had a “hissy fit”.  We recently described the event as such in a blog post on our website at www.taylorfrigon.com for those who want a further description of a hissy fit.

Another aspect of this correction (that would not have been obvious to the average investor) is the extremely low volume which accompanied this setback.  Typically, when something very impactful is happening in the markets, at some point volume swells and then a “capitulation” happens (or the proverbial “throwing in of the towel”), typified by high volumes.  At least in our portfolio, we observed very low levels of volume in most of our companies.  And that low volume trended lower as the correction got more severe, which is exactly the opposite of what one might expect.  We cannot arrive at a definitive answer as to why that was the case this time, except to say that there was a classic “buyer’s strike” happening.  But we are not willing to say that was the only reason and continue to seek out further explanation for the occurrence.

Perhaps the strangest, and almost surreal aspect of this market episode, has been a sense that there is now a well-entrenched “crisis industry” that has captivated media, economics, politics and popular culture.  We have commented on the pervasive media negativity that has persisted for years, and the constant drumbeat of impending doom that seems to emanate from the financial punditry.  However, this time it appeared as if it was even more “manufactured” than ever before.  Perhaps it was simply all too coincidental, but it certainly underscores -- and we believe validates -- our point that it is essential to make investment decisions based on the business merits of a company.  Our process is rooted in such an approach and has been for decades. 

From that perspective, we fully intend to own companies through multiple market and economic cycles.  When doing that, it makes these volatile environments much less of a concern.  No doubt, it makes planning for both individual and institutional investors crucial, but we are convinced it is the best way to build wealth over time. 
We are extremely encouraged by the companies in our portfolio as many of our “narratives” derived from our views on demographics, business processes and technological innovation, are really coming into their own right now.  We have transitioned out of some companies that we owned for many years, such as Fiserv and Amazon, and have repositioned our portfolio for these new and exciting ideas to come to fruition.  

For example, in our demographics “schema” the focus on how millennials manage their finances is highlighted by companies like Green Dot and Alliance Data Systems.  As baby boomers age, companies like NovoCure (cancer treatment) and Glaukos (glaucoma) are helping them live healthier and longer lives. 

Regarding business processes, the way engineering projects are managed is being reordered by NV5 Global, and companies’ IT processes are being revolutionized by EPAM Systems, to name just a few.   Zuora is helping companies who have embraced the “subscription economy” by making it much more efficient to run businesses that require the complex accounting for recurring revenue streams that come from subscriptions. 

As for technological innovation, which continues to be the primary driver of growth everywhere, it is going through its own transitions as intelligent data processing begins to emerge in “edge clouds,” dwarfing the processing done today in centralized data centers.  Companies like Quicklogic for low-power programmable processing, and Nvidia for massively parallel processing supporting artificial intelligence and machine learning are driving these trends.  Vuzix with their innovative “Blade” glasses are enabling the AR phenomenon to become “reality”. 

Many of our companies cross over into multiple schemas and narratives, adding even greater opportunities that are tied to these various business trends on which we are focused.  We can simply say we are more excited about the possibilities our companies represent than we have been in many years.  No correction, nor bear market will shake that enthusiasm!  Stay tuned and stay invested!

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