“People see stock prices as rootless, random, and inherently unstable. This mindset regards stocks not as ownership of businesses but as so many casino chips.”
– Nick Murray
Last month, we gathered with some valued clients for a live discussion of our investing philosophy. This month, we marvel at the earnings power of the business we get to own.
Great Investors Know a Great Business When They See One
Save the Date for July 10
We have been publishing our “Great Investors” article series for over 10 years now, and this series has consistently been our most popular content every year. We thank our loyal readers, and we truly appreciate your comments and feedback over the years.
As you know, we have changed the format for our “Great Investors” series from a monthly written commentary, to a quarterly webinar format. We will deliver a brief talk, summarizing our outlook on current events, delivered in the same style you have come to appreciate in our monthly article series. We will then have ample time for Q&A and discussion, in order to address any additional questions you may have.
Our next webinar will be held on Wednesday, July 10, and will be available via online live stream and in person for those who can’t attend. Please save the date, and more details will be available soon!
Stocks or Businesses?
Over my 30 years working as a wealth manager, I have noticed that, for some unknown reason, Americans have a very hard time understanding the nature of stocks as shares of companies, which represent a direct ownership of the earnings, cash flow, and assets of businesses that they themselves patronize.
Most people don’t view the “stock market” as a portfolio of businesses with real earnings and real dividends but instead as part of some big casino. They see stocks not as ownership of businesses but as casino chips. In our quest to become great investors, we are wise to remind ourselves that stocks are actually shares of the profits, earnings, and assets of real companies, made up of real people with real ingenuity, creativity, and intelligence. We should think of ourselves as owners of successful businesses rather than as investors in “the stock market.”
Recently, I came across a tabulation of the ten largest companies in the S&P 500 by 2023 revenues and thought you might like to have it — to understand the enormous revenue streams of these companies. Not to mention that these are businesses, many of which you probably buy from all the time.
Next time “the stock market” takes a temporary dive, this may help you to remember the genuinely world-class businesses you own.
The Recession That Wasn’t
According to Jim Reid at Deutsche Bank, “The 2s10s yield curve” has now been inverted for 625 days since July of 2022.
For those readers who are not students of the “yield curve,” allow me to explain this in plain English. The common definition of a “Yield Curve Inversion” is a time when the yield on 10-year Treasury bonds is lower than the yield on 2-year Treasury bonds. This is an unusual condition because typically, longer term bonds have higher yields than shorter term bonds.
This condition usually occurs when bond market investors expect a recession or economic weakness ahead. The logic is that as the economy weakens, the Federal Reserve will be forced to cut interest rates to stimulate the economy. Many economists and market pundits consider this signal to be an extremely reliable predictor of a coming recession, and many investors regard it as an extremely pessimistic sign for the stock market.
However, since this condition occurred back in July 2022, there has been no recession yet at all. More importantly, the S&P 500 is roughly 36% higher today than it was back in July of 2022. All of which provides yet another data point to reinforce some of the recurring themes of this article series:
All of the best indicators we might use to predict the stock market and economy should be considered 100% reliable … until they aren’t. The fact is that the economy cannot be reliably forecast, nor can the market be reliably timed.
Only a long-term investment policy driven by a long-term financial plan — derived from an investor’s most cherished goals and therefore unconnected to the current economy and/or the markets — offers any hope of enduring financial success.
Helping Those You Care About
Over the last two years, the faith of all long-term investors has been severely tested. As must happen every few years, we were basically required to do just one big thing: reject the idea that “this time it’s different,” and hew to the belief that “this too shall pass.” We must not doubt that we’ll get many additional opportunities to practice patience and discipline in the years to come.
Successful investing, while always fundamentally simple, will never be easy. You may have a family member, colleague, or friend who perhaps did not fare as well during the 2022-23 bear market and who you feel might have benefited from the sort of advice you were receiving. Should that be the case, we would certainly appreciate you introducing us to them. We very much enjoy working with you and would welcome the opportunity to offer the same level of planning and service to people whom you care about.
You are more than welcome to bring a friend or family member to our event on July 10 or to share the recording of our discussion that night.
Thank you, most sincerely, for being our clients. It is an honor and a pleasure to serve you. All the best!