The Markets... A Very Efficient Discounting Mechanism...
The Financial markets are off to a good start in 2023, and we are in the midst of another bear market rally. So, is this the one that will finally bring us back to all-time market highs? Maybe, maybe not, but we will get there eventually. What we do know now, however, is that (as usual!) investors get more pessimistic as stocks move lower and more optimistic as they move higher. We think the opposite is the better approach. As Warren Buffett always says, "Be fearful when others are greedy, and be greedy when they are fearful."
Although conditions have not changed too much in January, many investors seem to be confused by the markets. Stocks and bonds are up nicely so far in 2023, but why? Aren’t we going into a recession? Isn’t inflation still too high? Aren’t corporate earnings going to slow? Isn’t the Fed going to continue raising interest rates beyond the quarter point increase announced yesterday? The answers may be respectively "yes, yes, yes and yes." But the markets are a very efficient discounting mechanism; that is, they price in bad news well ahead of time. This is largely why nearly all markets were down last year. And as we start this year, the news thus far is just not as bad as expected; as such, markets have been able to gradually recover on news that is just “less bad” than feared.
As you hopefully know by now, our investment philosophy starts with a value approach. This means we tilt our portfolios to reasonably priced securities, very mindful of how much we pay for any investment. Valuation matters! As we all saw, 2022 was a great example of what happens to overpriced stocks (i.e., those stocks that trade at very high multiples to earnings---or with no earnings at all!) when we face adverse market conditions. In 2022, it was higher inflation and rising interest rates. This scenario left many "high-flying" stocks—with very expensive valuations-- just decimated.
To illustrate further the importance of value investing, please view this very brief video from one of our business partners.
The rebound in value shows importance of discipline...
As you will hear, value investing has outperformed growth investing by about 3% a year for almost a century!
But even more key to long-term success and financial independence is DISCIPLINE and keeping your emotions in check.
As always, we welcome any questions you may have about the markets, the investments we own in your portfolio or any other financial matter on your mind. Please feel free to reach out. Thank you!
Have a great upcoming weekend!
NCM Capital Management