If history is any guide, this market drop off will end.

We were spoiled by the 2020 drop and recovery, which all occurred in 164 days. That is the shortest recovery on record. In the past, most have taken well over a year from the bottom to reach prior market levels. And we are still not sure we have seen the bottom of this market. What does not work is selling at the bottom to lock in the losses.

I remember talking to a woman in 2000 whose account had plunged 98% from the dot.com crash. She was despondent about the loss and decided to put the remaining 2% of her portfolio into bank CDs. At the time, CDs produced a return of about three percent (3%) annually, and so it would take 107 years to recover what she had lost. If we also consider inflation, she will never recover the purchasing power of her lost portfolio. Of course, she was heavily invested in the dot.com stocks that had poor, if not horrible, fundamentals. She was ultimately speculating, not investing. But even during that time, there were plenty of very fundamentally sound stocks that sold off. Yet unlike their weaker counterparts, those fundamentally sound stocks did recover to rise to new highs.

Selling at the bottom and switching strategies is often the tried-and-true method of losing. We have seen it attempted again and again during the Great Recession, the pandemic, and right up to 2022. The dot.com investor sold at the bottom and locked in those losses by investing in CDs that would never recover the value of the portfolio.

The dot.com crash was followed by over ten years of plateau in which the DOW and S&P 500TR meandered but did not reach new highs until 2011. Since then, those indexes have tripled.

We are living in a very different time from that which followed the dot.com crash. Between 2000 and 2020, interest rates and inflation were both very low. Times have changed. When times change, so do investment themes. Lisa Shalett of Morgan Stanley Wealth Management told Barron’s in an interview, “The formula that worked over the past decade was passive, U.S., growth, megacap. That formula will fail over the next decade.”1 Shalett refers to those strategies that invest heavily in index and passive funds. Those investment vehicles are focused in a limited number of stocks which have soared during the last decade. This, of course, means heavy investment into the big tech “FAANG” stocks, which were fast growing giants even when not always profitable.

The Barron’s article continues, “There will be opportunities for the stockpickers in innovative new frontiers. Labor shortages and a potential shift in supply chains closer to home will spur investments in factories that rely on robots and automation. Renewable-energy generation will take share from fossil fuels. Genomics, telehealth, and Big Data will transform the way receive healthcare. Applications of artificial intelligence—whether predictive analytics, natural language processing, computer vision, or another area—will become more widespread across companies and sectors.”2

That description specifically illustrates what we do at AFC. We expect to be grappling with inflation and a chaotic economy for the next ten years – or maybe even longer. History does not repeat but it does rhyme. The gyrations of the stock markets from the mid-1960s to the early 1980s provide some insight into what a future with inflation may hold. It was not an easy time and the swings could be pretty dramatic. But even then, there were individual companies that did very well, and we believe there will again be companies that do well in the next ten years.

When we pick our stocks, AFC’s investors know precisely why each company is in the portfolio. We want to be able to project with some higher degree of probability that a company will grow, generating profits and cash flow to the benefit of the shareholders. The companies in the portfolio, we believe, will succeed in spite of the chaos that will be the economy.

We have said it before, and we will continue to say it, AFC accepts that there will be times of periodic loss, setbacks, and unexpected occurrences. Calamitous drops do not scare us out of the market.

I heard the story of a man and his grandson who were climbing the Mt Zion Narrows hiking trail. That trail goes up 2,000 feet to the top of Mt. Zion. But near the top, the trail grows narrower and more difficult. The two of them sat down to rest before finishing the climb. The grandson recognizing his grandfather’s fatigue suggested they had done well to get this far, and maybe they should call it a day and turn around. The grandfather responded: “The trail is like life. People struggle and strive and just when the going gets the toughest at the end, they give up and never realize the pinnacle that was just a few hundred feet away.” They finished the climb.

The lessons from the great investors like Warren Buffett, Peter Lynch, Rowe Price, John Templeton, and others is clear. They all went through difficult times, but they stayed the trail and made the final steps to the pinnacle.

 

Mike Adams

Notes:

1. Jasinski, Nicholas. “Turbulent Times Are Here to Stay. How to Invest for the next Decade.” Barron’s. Barron’s, September 29, 2022. https://www.barrons.com/articles/how-to-invest-long-term-stock-bond-markets-51664404719.

2. Jasinski, 2022.