Our investment approach is a bottom-up, fundamental research method that emphasizes the importance of individual stocks and companies, as opposed to a top-down approach, that focuses on larger, hard to predict themes such as the economy, politics, and market moving events. We believe this approach allows us to withstand short-term fluctuations, by avoiding the noise of short-term, volatility inducing events. Rather than begin with a theory about the direction of the economy, then develop expectations about which sectors will rise or fall, then choose a company within that sector, a process that layers broad assumption on top of broad assumption, we search out good companies across a wide swath of sectors and industries. From there we conduct due diligence on management teams and financial statements, comparing and assessing these companies based on very specific criteria. Our opinion of the economy and the stock market is then derived from our collective view of the companies we own and follow for our clients.
To be clear, we are constant students of what is happening on the domestic and world economic and political stages, but our analysis of these events plays a supplementary role. Take the election for instance. We can’t claim to know what the future holds, but there is always the potential for short-term volatility following an election. Like any other major event, we will watch eagerly, but will make our investment decisions for the long-term. In fact, history suggests, the short-term volatility following any election is a poor predictor of future stock market returns, especially for the subsequent 12-month period. According to Bloomberg, the S&P 500 index fluctuates an average of 1.5% the day after an election. While this is no small amount for a one day market move, gains and losses predict the market’s direction for the next 12 months less than 50% of the time. A few months down the road, we will likely add this presidential election to the list of recent over-hyped events which includes the Russian-Ukrainian Conflict, the Greek Debt Crisis, the Chinese GDP Slowdown, and Brexit. Following the election, stay tuned for the next big media sensation, the Fed’s December decision on interest rates.