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!
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!
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.
