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The Lonely Bull, July 2020

July 2020

Number 88

TALK WITH US

As a result of the recent crisis and panic, the benefits of working with a good investment manager should be clear. Selling and then trying to get back in at favorable prices proved to be next to impossible. Too many investors, without the steady hand and advice of real professionals, damaged their financial futures. The psychological hurdle of rebuying, what had recently been sold at higher prices, becomes too much. Then the investor is rooting for more downturns from the sidelines, a very poor position for any serious participant.

Investing requires a good measure of faith in the future and the belief in the benefits of free enterprise. History has been on the side of that optimism. Just look at a long-term trend line of stock prices throughout the past 100 years. How many crises have occurred over that time? Wars, assassinations, civil unrest, and on and on, can be recounted over that period. Yet, stock prices have increased dramatically. In the late 1970’s the S&P 500 was trading in the 90’s. It is now over 3000. How many times the original value is that?

Performance measured against an index is one way of judging the value of an investment service. But another is catastrophic mistakes avoided. It is the personal trust in the perspective and experience of a frontline professional. This measure, although difficult to make, may be more valuable than performance itself. So, if you thought going it alone was the only way to go, reconsider. Your financial future is too important to risk; Talk with Us.

PERSPECTIVES

Second Quarter

Unusual yet familiar; no one living today has lived through a pandemic like Covid-19. Yes, there have been outbreaks of Swine Flu, Bird Flu, Ebola etc., but not since the Spanish Flu of 1918 has there been something like this. Plagues have been a part of mankind’s past but with modern medicine, somehow, many of us believed these were consigned to history.

What is familiar is another financial panic. With this, we have had plenty of experience; the financial panic of 2008, the tech-bust of 2001, and many others. Panics are a feature of free enterprise financial markets and seem to be normal. It is people interacting with others and human psychology playing out; fear and greed, exuberance to panic. As long as people are people, these will continue to occur.

The market downturn this Spring was one of the fastest ever. It may have to do with the perceived seriousness of Covid-19 and also modern automated trading techniques. The drop was so fast that liquidity quickly dried up. There were simply no buyers on certain occasions. Trades were made at ridiculous prices. For most individual investors, selling then trying to buy back in at even more advantageous prices was next to impossible. The best course was to simply remain committed to longer-term strategies.

As rapid as the downturn was, the recovery was just as quick. Many pundits predicted a long period of recovery; they were wrong. To be sure, much has changed. Changes that were already underway in our commercial lives have accelerated. Online commerce and remote work are two obvious ones. The trend toward more urbanization may be reversed by dispersion of people into more rural areas. This will bring many changes of their own. There will be many more.

For investors, the landscape has become even more dynamic. There are yesterday’s businesses and new disrupters and businesses that support new needs and ways. This has required quick adaptation to this new reality. Riverplace Capital has quickly grasped this and modified strategies to better benefit this new business world. The question is, “what happens next?

Forecast

Economy

Riverplace Capital does not have a crystal ball but must make informed judgements as to what is coming. Our belief is that the economy is recovering from the enforced Spring shutdown. It may be irregular in its progression, but people are eager to get back to some sense of normality. The reopening is being led by the young. The old, the infirm, and the weak are much more cautious and need to stay safe.

Economic growth should begin rebounding during the second half of this year. Getting back to the robust activity we had before the crisis may take most, if not all, of next year. The recovery has been supported by aggressive action from our monetary authorities, and federal programs amounting to several trillions of dollars.

The history of downturns is that there are recoveries. This time is no different. However, there will be new winners.

Equities

Forecasters sometimes forget that liquidity is the fuel for higher equity prices. If money seems plentiful, there are likely to be more buyers than sellers no matter what the price. Many analysts trip up over valuation metrics. These may make sense over a much longer time frame, but change can rapidly make these arguments mute. Many of the great companies today have been expensive throughout their rapid growth trajectories.

The amount of money injected into our financial system may keep many asset prices higher than seems reasonable. This is where our economy is experiencing inflation, not in ordinary goods and services. Expect elevated price levels for assets to continue. The Federal Reserve will not be withdrawing its support anytime soon and the federal government may increase its.

Fixed Income

Some time ago, Riverplace Capital accepted that low interest rates were here to stay. It may not be forever, but much longer than many investors and savers would like. The consequence of this is that income needs must be funded from less traditional sources. Bonds may provide some measure of safety, but little cash flow.

A better strategy, we believe, is to invest in good dividend paying companies. Obviously, it is important to be very selective in choosing ones that can and will sustain their payouts, if not increase them. This approach has potentially more volatility in asset value but can also benefit from the general appreciation over time. It is a trade-off that is reasonable for some needs.

Investment Strategy

Equities

Faced with a changed business environment, after the effects of the pandemic became known, Riverplace Capital adapted strategies to better benefit our clients. Some growth companies became even more important. Many older ones were simply being bypassed. The panic in the early phase of the downturn provided good opportunities to make positive changes and pick up bargains.

Riverplace Capital also booked as many losses as reasonable. This was done by switching some positions for equivalent, if not better ones. Losses can be used to offset gains taken earlier in the year or used in the future. It is simply good tax strategy. Riverplace Capital has prided itself on producing tax efficient returns.

The result of the changes we made are strategies more focused on the growth opportunities of today. Value issues have been reduced although we have kept a balance. We are being patient with a few companies that are extremely cheap and have catalysts for reappraisal. In some cases, we anticipate buyouts as possibilities. However, value strategies have not been productive for some time and on their own are unlikely to be anytime soon.

Fixed Income

There is too little difference in yield between short-term fixed income instruments and longer-term ones to be worth the risk of committing capital for too long a period. Where safety is a primary concern, we have limited purchases to maturities under five years.

Our preference, however, is to get needed cash flow from the equities of solid dividend paying companies. This strategy has proven out well over the years but can have more near-term volatility to portfolio values.

 Wealth Management

We have been patient with our selections in our asset allocation strategies. It is too difficult to constantly predict the constant twists and turns of investor preferences on a week-to-week or month-to-month basis. These strategies are focused on producing good long-term results with the safety of greater diversification.

Major Indicies

as of 9/30/2019

Large Cap Stocks (S&P 500) -4.0%
Dow Jones Industrial Average -9.6%
Mid Cap Stocks (S&P 400) -13.6%
NASDAQ Composite 12.1%
Small Cap Stocks (Russell 2000) -13.6%
MSCI EAFE -12.6%
Barclay Aggregated Credit Index 5.0%
Inflation 3.6%

Equity indices are three-month returns excluding dividends.

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“The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”

Warren Buffett

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© 2019 Riverplace Capital Management, Inc.
Information contained herein is prepared by and is the sole property of Riverplace Capital Management, Inc. Written by Peter E. Bower, President.
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