We have been warning our clients for months that a correction in our portfolios was inevitable. It is here!
In those warnings, we suggested it would be normal, although likely short, sharp and shocking (Pink Floyd fans will appreciate that sentence!). Ten to fifteen percent corrections are normal and healthy to shake out the weak hands in our companies.
Given the fantastic rise in our growth portfolios since the COVID-induced downturn last year at this time, an even deeper correction would not be at all surprising. As we have counseled for our entire professional money management careers, it is crucial that investors stay calm, centered and still in these types of markets.
More so than ever, stock prices, in any short-term period of time, are impacted by almost anything but fundamental business activity. Over time, those business fundamentals will ultimately drive values of companies. However, those who react to the crazy volatility that can occur in these short bursts -- as we are witnessing now -- do so at their own peril. If the proper planning has been done, an investor should have ample cash on hand to handle whatever near term needs he or she may have.
Certainly, in the last few months we have been advising those who rely on cash flow from their portfolio on a regular basis to take advantage of recent positive performance and add two to three years worth of cash needs to their cash accounts. This was not a timing call; simply practicing prudence. However, the vast majority of investors, who do not have near term cash needs, are best served riding the ups and downs out.
This entire situation highlights the importance of the distinction we draw between true investing and what we call "short-termism." It is why we say "We predict businesses, not markets." The short-term gyrations of individual stocks and in fact entire markets almost never has anything to do with actual business fundamentals (sometimes they do, but more often not). Trying to predict these short-term moves -- or worse, trying to base one's investment strategy on predicting and timing such moves -- has always been impossible, and in the modern landscape of high-frequency trading, massive algorithmic trading schemes, and now the social-media induced get-rich-quick flavors-of-the-minute being touted on Reddit and traded on RobinHood, we would argue that short-term strategies have become more hazardous than ever.
Don't take that comment about RobinHood the wrong way: in fact, we very much applaud the concept of retail investors participating in the market and always have. But what RobinHood has done with its emphasis on the so-called "free" trading (which may not have traditional commissions but which are anything but free) and with its gamification of the entire process (and its encouragement of short-term tactics such as options trading) has pushed an entire rising generation of retail investors into even more short-termism, which ultimately becomes indistinguishable from gambling.
Meanwhile, we continue to look for solid businesses, and spending virtually all of our time analyzing and predicting the business prospects of individual companies, rather than markets, central banks, hedge fund shorts, bond yield gurus, and the plethora of ETF gimmickry which has invaded the investment world like a toxic bloom of algae.
To our investors and indeed to all our readers, we say of this current meltdown (however long it runs): "This too shall pass." Remain focused on the long-term prospects of good businesses, businesses which can be reasonably expected to see even more demand for their products and services in five years than they are seeing today.
We would add in closing that the most-recent round of earnings has only solidified our confidence in the outstanding prospects of the businesses we own on behalf of our clients, and highlighted the importance of focusing on the business, rather than running around in circles trying to predict the next move of the market.
* At the time of publication, the principals at Taylor Frigon Capital did not own securities issued by Gamestop (GME), TD Ameritrade (owned by Charles Schwab Corporation, SCHW), or Robinhood (private).
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