Volatility is back which means we have returned to normalcy! It has been quite some time since we have experienced what is deemed to be a normal market correction, that is, a ten percent correction in pricing. We brought up the possibility, and quite honestly hoped, the markets would return to more normal patterns.
For the first time ever (and ever is a long time) the S&P 500 delivered a positive return every month last year. This is not the case so far in 2018. What we have experienced so far is considered more normal than recent years and we expect more of the same going forward. Last year volatility, as measured by the Volatility Index (VIX), hit the lowest level ever.1 Again, ever is a very long time. It may also be relevant to understand that 500 points on the Dow Jones Industrial Average obviously isn’t what it used to be. On October 19, 1987, the Dow lost 508.32 points. It represented a 22.6% decline. Lately, the Dow has moved 500 plus points or more…within minutes. Somewhat unnerving, but it is only approximately a 2% movement.
What are investors to do? We believe that staying invested is an important fundamental investment philosophy. Market timing is not. One might wish to move money to the sidelines and let all this volatility settle down before coming back in. Over the past twenty years, being out of the market can have some dramatic impact on performance. From January 1, 1997 through December 31, 2017 the S&P 500 earned 7.20%.2
If you missed the 10 best days your return was 3.53%.
If you missed the 20 best days your return was 1.15%.
If you missed the 30 best days your return was -.91%.
Tempting as it may seem, being out of the market for just the 30 best days over the past twenty years moves you from having a positive investment experience to one where you actually lost money. We have seen a lot of ups and downs over the past twenty years. Some very strong and some pretty dismal years. Trust me, if we knew how to time the markets we would. As Warren Buffet stated in his last annual report. “The light can go from green to red without pausing at yellow. No one can tell you when these will happen.”
He went on to say, “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
If you can keep your head when all about you are losing theirs…
If you can wait and not be tired by waiting…
If you can think-and not make thoughts your aim…
If you can trust yourself when all men doubt you…
Yours is the Earth and everything that’s in it.”3
The fundamental backdrop remains strong in our opinion. What triggered some of the market jitters was reports that wages are increasing, economic growth is strengthening, and interest rates will continue to move higher. The adage that sometimes good news can be perceived as bad news holds true temporarily. The markets appeared to have a need to reset and return to more normal patterns of behavior. All of these circumstances have been anticipated and quite honestly all may be needed over the long-term. We are also digesting the potentially positive impact of new tax legislation and infrastructure plans in the United States. However, we compete in a global marketplace and geopolitical concerns, potential trade wars and the Washington DC turnovers leaves most of us feeling at least a little uneasy.
I can’t help but end with this final quote from Warren Buffett, “Charlie and I view the marketable commons stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on the “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead we simply believe that if the businesses of the investees are successful our investments will be successful as well. In America, equity investors have the wind at their back.” For us, we couldn’t agree more.
1 UMB Distribution Service, LLC. FPA Investors First. FPA Crescent Fund Annual Report. “FPA Crescent Fund Letter to Shareholders.” Pg.1. December 31, 2017. Milwaukee, WI.
2 J.P Morgan Chase & Co. Market Commentary. February 6, 2018.
3 Berkshire Hathaway Inc. Annual Report 2017.