Having spent the last forty years observing markets, analyzing companies, and listening to the constant variety of “advice”, I sympathize with your current unease. Here is the truth: stocks may well decline in the next three months and will certainly be a “bumpy and sideways” ride until the 2022 elections. Overvaluation and a declining rate of economic growth is a lousy recipe for stock price advancement. But should you sell? Let’s clarify that through the eyes of a stock picker.

From the top, know that we are very comfortable managing portfolios owning individual stocks, always have. To see why, view the credentials at our web site (kic317.com). 

Perhaps the key point of departure between most people and a stock picker/analyst – a nickname for someone who studies companies – is the stock price (or index/ETF price). To most, price is the end all, containing and conveying all the information needed to know. It’s either going up, or it’s going down. Period.

Sure. To traders and algos, yes. To a stock picker/analyst, no.  It’s whole lot more.  It’s a valuation that may or may not match what the company is doing or has ahead of it. As such, it represents an implicit potential rate of return.

What goes into that assessment is an in-depth study of how the company makes money, what puts that at risk, and if their management is capable of sustaining or improving their use of capital. And more broadly, does the company have a chance at earning a competitive rate of return on investment due to economic and/or governance conditions. 

It is also a view of the world which then translates to the construction of your portfolio. How? Companies will be exposed to many cross influences and risks, many of which may have a similar effect on other companies or assets in your portfolio. Knowing what affects a particular company helps to avoid the unknowing doubling up on risks elsewhere – also known as non-diversification - unless of course, that is your intent.

To the current economy, take comfort in this:  forty years of observing our American corporations up close has witnessed their remarkable ability to adapt and keep growing. Sure, failures make the news, but well-run corporations find a way. True to form, most are notably different than what they were at the turn of the century – they have to be, look at what has happened in 21 years. Or, look at Amazon. Big portions of the company had not even dreamed of back in the year 2000. Companies (and our economy) are in a constant state of evolution, driven by competition, demographics, and economic policy.

Is ownership of properly selected stocks or ETFs a “set it and forget it” proposition? Of course not. That is certainly the intent and when it works out, that’s the best taxable result. But dogged competition happens in the real world of business, so a constant vigil is needed. What is the proper sell signal? If a company cannot keep their growth going. The trick is discerning whether the assessment is temporary or permanent (aka poisoned).   Fortunately, only minor changes are typically needed in a well-researched portfolio in any given year.

Right now, stocks are priced at generous valuations, and it is hard to see them rising significantly from here. So, should you sell? Or at least rebalance? No on both. Stocks, and markets do occasionally rise to “over-valued” levels which is not a real problem, nor a reason to sell.  And, in my opinion, the advice to rebalance is one of the more destructive tactics. It’s about ownership. If the stock or asset will grow more valuable over time, keep it. Selling causes taxes – an actual cash loss - and reduces ownership of the growing asset. And most important, it reduces the underlying compounding.

This will help. “Look through” the stock price (or index) to the individual company. Properly selected, it is doing what you want it to do, just in slow motion. Day in and day out, grinding it out on the ground, growing more valuable every day and over time. Measure that by their balance sheet growth and return on equity. That’s what is important.

Even “blue chip” companies have stock prices that can move +/- 50% in a year. The question is so what? If you’re a trader, maybe something. If you’re an algo, maybe something. But, if you are a taxable investor and the stock price is lower, it simply means you are paying lower management fees. That’s all.

Yes of course, if your time horizon is ten years or less or have significant liquidity needs coming up that is a different discussion.

So how does a stock picker/ analyst view the current market? In brief, expensive with not many interesting investments at these valuation levels. Hold onto cash for future opportunities. Many companies are scrambling to evolve with the changed economy and consumer/business behaviors due to Covid. Re-thinking of supply lines and location of manufacture/distribution continues. Still many snags due to the virus but they will smooth out. Many “one-time “costs but they too will level out. Enjoying the stimmy surge but only cautiously adding to capacity, if at all.

More broadly, our view is that the key, driving event is the 2022 elections. So, view all upcoming political theatre in that context and in particular, legislation that proposes to “stimulate” our economy and/or promote remedies to populations that are in need. Talk about increasing taxes is of concern, though hard to believe in an election year. It’s going to be noisy, and the markets will react based on changing perceptions, as always.  

Hopefully, the core message of this essay- that there is an actual company behind that stock price, growing more valuable each and every day – will offset your concern triggered during times of lower stock prices. Forty years on, this stock picker continues to be amazed at the American corporation and its ability to adapt, innovate, and keep growing.