Investment Climate July 2023: Embrace the Volatility!

We will dispense the formalities of reporting the news this quarter and jump right into the point which we almost always end up making: The best strategy to build wealth over time is the ownership of well managed businesses which are in fertile growth fields.

Volatile markets are the friend of those who adhere to that strategy of investment. Why? Because you can ignore the market. It’s all noise. As our mentor and partial namesake, Dick Taylor, taught us (and T. Rowe Price taught him), “are you going to let 1% of shareholders tell you what your company is worth on any given day? No! Use your own conviction, based in study and experience, and ignore the short-term price movement!” You can take advantage of the downward swings to add to your positions, and the upward swings to rebalance to new growing businesses or existing ones that are in a downtrend.

How long is “over time”?

A lifetime!

In fact, it should be over multiple lifetimes, in our opinion. Yes, short-term, in our view, is 10-20 years. Intermediate-term is 30-50 years! Long-term is 100 years. Yes. That’s right. For families who have accumulated true wealth throughout history, that is the approach they took!

Putting the punchline at the beginning serves a purpose, because the second quarter of 2023 was a great example of the folly of making decisions based on what the market is “telling” you on any given day, or any given quarter, or any given year, or any given market “cycle”. In a short period of a few weeks (even a few days) the wild swings that occurred, had they been acted upon, would have whipsawed most investors (better described as traders) into oblivion, inflicting untold stress and anxiety on those folks even if they guessed correctly. The market sent false signals, in both directions, that were enough to make the most savvy of traders weary. At the end of the day, short–term market movement gives you little information about what is ultimately going to drive the value creation which comes from ownership of businesses.

This is not to say there is no value in market signals. Over long periods they certainly will reflect the ability of a company to deliver on its promise. However, the market is notorious for overstating as well as understating the value of a business. And most importantly, successful businesses over many market and economic cycles will often have significant swings in value, sometimes 50%, 60% and even 90% down, and multiples up. This allows investors to buy more of a great company when it is down, and use rebalancing to finance the purchase of new growth businesses when that company’s stock price is way up.

What the last, very challenging two years has reinforced for us is that great companies and capable management teams manage through difficult times very well; much better than traders trying to guess the next market movement. We have been nothing short of blown away by how well our portfolio companies are faring through what has been an unprecedented three years since the onset of the COVID fiasco. While the market prices of their stocks have not always reflected it, we own some of the best companies in the world, and in many ways, the smaller companies are described that way even more so than their larger counterparts!

Aso for the overall price performance in the second quarter and early third quarter 2023, strength has returned, particularly to growth companies. This appears to be in expectation of the peak in inflation and interest rates. We believe the market is correct in its expectations about interest rates. What remains to be seen is how much the economy will slow, or recess in the wake of the dramatic rise in rates over the last year. Regardless, we believe we are very well positioned in companies whose businesses will be resilient no matter what the characteristics of this economic cycle. Stay tuned.

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, or 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.