To my clients,
I wanted to put together this article to address a few questions that I imagine may have popped up in your heads over the past couple months. Throughout October and November, markets have experienced volatility that has flirted with correction territory. We all understand that volatility is a given within a portfolio, but I would also like to point out that volatility in itself is not the enemy that should scare us. What we need to avoid is the purchasing of companies at market values highly above their intrinsic value. This is exactly what our portfolio managers are focusing on achieving. Purchasing quality companies, at quality prices. As we reach the peak of a bull market cycle, valuations of many companies will have been artificially bid up and purchasing at these levels can significantly increase our downside potential. Inherently, that is why many of our portfolio managers end up holding larger cash weightings near the peak of an economic cycle.
My focus on Value-Growth investing is in place to help mitigate this risk. It also plays very nicely into the main factor of our investment philosophy; downside protection. As well, our portfolio managers all retain these same principles. I frequently say that our investment philosophy will not be the topic of conversation at your dinner parties. In my opinion, that is a good thing. As others get carried away with purchasing companies at much higher values than intrinsic, they may see larger short-term results. With that said, they are not only increasing their downside potential in the next bout of economic stress; but when that economic stress hits and the market values of those shares fall they will most likely not hold the cash required to purchase companies below their intrinsic value. Our strict philosophy will allow our portfolio managers the opportunity to be in a comfortable spot to scoop those shares up.
If everything I am saying is correct, then why aren’t we holding cash completely? I am an advocate for planning, but I do not believe in the long-term timing of markets. We need to be strict with our due diligence and company valuations, and we need to work with those that retain our values. It is imperative to steer clear of market speculation. We cannot say when the next bout of economic stress will happen, but we can plan for it based off of facts and merit.
Our funds will see volatility. Depending on our portfolio manager purchasing prices & cash weightings, that volatility should be limited and could even help push companies into our purchasing price range. As Paul Musson would say, “At the end of the day, the most important thing is that you arrive on schedule rather than worrying about leading the pack the whole way there.”
Sincerely, Ryley Hughes