Beginning with $400,000 in the early 1990s, the account has grown multitudes in the thirty years I have been managing it, and in that same time the owners have withdrawn $11,838,147. The account was still at $748,380 at the end of the second quarter of 2023. The first $100,000 deposit was made on December 31, 1990, and a year later they added $300,000. Within six months, the account was down 70%. The market drops we dealt with in the early ‘90s actually remind me in many ways of the market volatility we experienced during 2022: The Federal Reserve was raising interest rates under Alan Greenspan, the yield curve was inverted, and Wall Street was convinced the sky was falling. It was not the sky that was falling, but portfolios values.
The common phrase is that “Wall Street does not like uncertainty”. Yet, we live in uncertainty all the time. What Wall Street does not seem to like is confusion.
- Confusion over the impact of the Federal Reserve raising interest rates. Wall Street is confused about why there was no recession in 2022 or 2023. In fact, there may not be another recession for many years to come.
- Confusion over the inverted yield curve. Wall Street believes that the yield curve inverting signaled a recession by now. There is confusion over why that recession forecast by the inverted yield curve has not happened.
- Confusion over the invasion of Ukraine; Wall Street saw this as a further reason the recession should have started in 2022, and if not 2022, then 2023
- Confusion over inflation, which does not seem to be going away anytime soon.
- Confusion over an American economy that continues to grow in the face of inflation and the Federal Reserve deleveraging, or “de-printing”, money.
Economists, business leaders, and institutional investors think of economics as a “science”. But unlike gravity or the speed of light, there is no Law of Economics. No matter how, where or when or by whom measured the speed of light in a vacuum is always the same. When you stand in your driveway and throw a 10-pound steel ball into the air, you are sure it will fall back to earth. The laws of physics, of chemistry, and of biology are provable and repeatable. The “laws” of economics only hold true sometimes – not all the time. So, confusion is natural.
I know that history does not repeat, but it does rhyme. That drop in the account mentioned above occurred between 1993-94 and again, 30 years later, in 2022.
The reality, to me, is that stock prices are determined by the earnings of the companies. When the earnings and revenues are growing, and growing at a significant rate, I believe that the stock prices will eventually follow.
Art Cashin, paraphrasing Bernard Baruch, said: “The stock market is a perception market. When it believes that two plus two equals five (2 + 2 = 5) the market will pay 4 ¾ all day long”. My corollary is this: “When the market believes that two plus two equals three (2 + 2 = 3), what it bought at 4 ¾ it will sell at 3 ¼ all day long.
Stocks have a price and a value. The price is what investors are willing to pay, but the value is what the share is worth. However, these metrics are not always coordinated, and one or the other may fluctuate with the perception market. At AFC, we grow portfolios by seeking companies whose earnings are very probably going to rise in the next five-to-ten years and buying the shares in those companies. Then, we wait for the price to reach the value of the stock. That philosophy has worked for the 37 years I have been in the business. Stock prices may bounce up and down, they may take a significant drop during times of confusion, but in the longer-term, this strategy seems to have worked to our clients’ advantage.
I stand by that approach. Of course, I always have to say that past performance is no guarantee of future performance.