As the year comes to a close, it is important to look back and consider the investment landscape that we have just traversed, as well as what lies ahead.
We are currently in the sixth year of this global expansion and bull market — both are shaping up like many that have come before. Stock prices have risen in the face of worry — sometimes quite justified — for much of the advance that began back in 2009. As has been the case in past bull markets, few investors participated in the first half of the advance — most likely due to worries regarding the catastrophic decline of stock markets in 2008. In recent years, investor confidence has risen and with it investor participation and stock prices. Interestingly, our research suggests that investors collectively are still underinvested in equities relative to fixed income and money market funds — which means that there are still many more latecomers who may be joining the stock market party, thereby driving prices higher. These data points suggest that this bull market, though aging and with corrections along the way, may have further distance to run. In fact, as we have mentioned previously, based on a number of metrics and our research, it appears that the current bull market has run about 2/3rds of its course or as we like to say we are in “the bottom of the 7th inning.”
One of the best ways to mitigate risk in the stock market is to sell before other investors decide to do the same — otherwise known as “sell high” after you “buy low.” Over the past 21 years of our firm’s existence, this concept has not been forgotten by our team and is something we consider when we feel fortunate to have made a significant profit. In that spirit, you may have noticed that this year we sold some (not all) of your shares in some of your most profitable investments. These partial sales mitigate the risk of the unknown, i.e. that perhaps we are actually in the bottom of the 9th inning, or there is an unknown problem with one of these companies that has not yet surfaced. It also provides cash to invest in alternative investments that may have equivalent promise — with less risk. In a taxable account this can trigger a long term capital gain unless, of course, you have a loss carryforward. We, like other great investors, embrace the idea that one should not sacrifice performance for taxes. This is particularly true today when long term capital gain taxes are relatively low. In past years, when we have created capital gains, we have suggested that the tax payment come from the portfolio and we would suggest the same when April 15th approaches.
Though we continue to believe that the bull market may continue to run, there is always a risk that the next correction could be the beginning of something worse. Therefore we continue to manage the risk of your portfolio through its asset allocation, sector management and the use of carefully placed stop loss orders.
We hope you find this brief update helpful. If you have experienced any changes in your financial condition or would like to get together for a review, please let us know. All of us here wish you and your family a safe and joyous holiday season!
Sincerely,
Your Team at Main Street Research