McSorley’s

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Way back in summer of 1980, my dad took me on my first business trip, to a life insurance convention in New York City.  It was my first visit back to the Big Apple, since I was a kid, when we traveled to Shea Stadium in 1969 to watch Tom Seaver pitch a one-hitter against the Pirates.  What memories…

During a late-morning break at the conference, my dad and a couple of his cronies escorted me to McSorley’s Old Ale House, a famous Irish pub in lower Manhattan.  I still have in my office a McSorley’s mug on which it says, “We were here before you were born.”  That phrase has been resonating with me lately…

McSorley's Old Ale House mug

Wherever we go, whatever we strive to accomplish as a country, brave men and women have gone before us.  From our veterans who fought for freedom around the world, to the brave men and women who fought for civil rights, these individuals were here before us, and we should remember who they were and what they believed in, and what many fought and died for.  We should never forget their sacrifice.

Today, too many seem to want to forget our history, or only focus on our shortcomings, but fail to acknowledge all that America has accomplished in our brief history as a nation.  Our history is our foundation, our measuring stick as we strive to become even better, individually, and as a nation.  It is a rich history.  One of innovation, competitiveness, an unparalleled work ethic, a commitment to family, faith, and community.  Are these attributes thriving today?  In many ways it seems they are not, but, like just about everything today, convincing arguments can be made on both sides. 

Managing portfolios requires a similar study and understanding of history.  The past provides a framework to assess relative valuation as well as the cyclical forces that drive the overall market.  Moreover, one of the critical attributes we look for when selecting a stock is a term we call “sustainable competitive advantage.”  We basically try to focus on industry-leading companies who are widening the gap between their peers, relative to historical metrics.  These critical factors include: innovation, market share, profitability, cost control, technology, strategic vision, and management discipline.  Very rarely does the competitive ranking within industries or sectors remain stagnant.  Competition is intense throughout the global economy and yesterday’s winners do not always lead into the future.  General Electric might be a good example of a company whose best days are behind it. 

What does a company or country do when it gets off track?  Experienced portfolio managers have an intuitive sense when it is time to reset the portfolio.  When valuations are stretched, when leading indicators are out of balance, when current measurements move too far from historical ranges, or when emotions become too extreme, prudent portfolio management calls for a reset.  This dynamic is at the heart of risk management, and one we take very seriously.  A pilot captured this sentiment perfectly when he said to a plane full of passengers who had become frustrated waiting for a mechanical repair before take-off, “It is better to be on the ground wishing you were in the air, than in the air, wishing you were on the ground.”        

How does a country reset itself?  Admittedly, this is much more complicated with many questions to ponder.  What is out of whack?  Whose fault is it?  What should be changed first?  John Wooden said, “It’s amazing how much can be accomplished if no one cares who gets the credit.”  I think it is also true that much more can be accomplished if no one cares who gets the blame for the problem in the first place.  So, my first recommended reset is for all of us to accept responsibility and stop blaming others.  Let’s just work together on solutions.      

It is widely acknowledged that fundamentals like earnings, inflation, and interest rates drive stock prices over the long run.  However, in the short run, emotions can be the dominant force moving stocks higher or lower.  Historically, market tops occur when euphoria gets too extreme, while market bottoms happen when fear becomes excessive.  The root of fear, as it impacts the markets and our country, lies in two variables, mistrust and a lack of knowledge.  When there is a sense that the game is rigged, mistrust grows.  When market participants fail to understand historical relationships or are inclined not to do in-depth fundamental research, decisions tend to be made based on emotions in lieu of thoughtful analysis.

Mistrust and a lack of knowledge seem to be thriving in our country.  We gravitate instantly to what we disagree about and never seem to find common ground.  It will take some effort, but I am convinced there are important principals that an overwhelming majority of citizens can agree upon.  Without going through that process first, I have little hope for progress.      

Deep-rooted knowledge, a prerequisite for meaningful dialogue, cannot be found on Twitter.  It requires in-depth study, time for personal reflection, and an occasional pause to listen to the other side.  If we could pull that off, that would be one amazing reset.   

We should at least try.  We owe it to those who were here before we were born.      

Michael Kayes, CFA

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