Why We Buy and Hold Good Companies
Posted on April 18, 2019
Timothy P. Vick – Director of Research
The investing world is forcefully and rapidly reinventing itself. Computer algorithms and artificial intelligence offer efficiencies never before available to wealth managers, yet enable rapid-fire, ruinous trading habits and threaten to remove all critical human judgments from decision-making. Likewise, the craze toward index investing and packaging together low-cost portfolios offers younger generations a chance to participate in market returns as they save for retirement. Yet the same craze ultimately commoditizes the investing process and does away with the diligence and common-sense prudence that have well served parents and grandparents for a century.
Like an old church that wants to incorporate modern music into its service, we think constantly about how to fit in with the changing landscape, and promise that as we grow and adapt, our core footings will continually be strengthened but stay intact. Since inception, the Trust Company has built portfolios around strong, growing companies that we know intimately and that fit your risk profile – for four essential reasons:
Know what you own – Managers are under undue pressure today to cobble together time-efficient portfolios and to paste these “models” across the firm. Often forgotten is that an analyst’s chief role is still to evaluate and forecast the returns of an asset and make sure that asset can deliver the risk-adjusted returns you require. One cannot forecast the returns of, say, an index fund or ETF that holds dozens of the best, and worst, of an industry’s or country’s corporations.
Control what you can – A common stock investor can control very little, other than what securities to own, and what price to pay for them. Everything else – the economy, interest rates, politics, corporate sales and profits, stock market fluctuations – is subject to exogenous forces. Once a portfolio is completely “packaged” into products, however, all control is lost. Owning individual stocks remains the best way to try to control clients’ returns, their income, and their taxes, and dovetails best into families’ estate plans.
Focus on growth: It overpowers everything – When you own a company that can increase sales and operating profits at respectable rates, a lot of positive things naturally happen to its share price. In the world of finance, this correlation is wonderfully dependable, and drives our thinking. Show us a company growing its sales at, say, 6%-8% annual rates, and we can count on 6%-8% growth in the value of the firm’s shares over time. Fill an entire portfolio with 6%-8% growers, and you can expect the same result. Often, it’s best to sit back and let executives of growth companies keep working their magic and enlarging their companies for your benefit.
Don’t “di-worsify” – Many of you amassed your wealth, ironically, by concentrating your resources. Now in retirement, the best practices call on you to diversify to temper both the growth and volatility of your wealth. But there are limits. A 100-stock portfolio chosen by a computer serves no end when a 40-stock closely watched portfolio can deliver the same results. Layering endless alternative investments onto a core stock, bond, and cash portfolio often just increases fees without enhancing clients’ financial plans. Chasing emerging markets stocks without fundamental justification often has led to disappointment.
Nobel Prize-winning economist Paul Samuelson once remarked that sound investing should be like watching paint dry. “If you want excitement,” Samuelson said, “take $800 and go to Vegas.” How true. Decades of research, as well as real-life examples, have shown us the value not only of investing heavily in stocks (as opposed to other asset classes), but maintaining a disciplined, patient approach to holding stocks and matching all our investment choices exactly to clients’ needs and goals.
If you’d like to visit with us to further the discussion on how we approach wealth management, we welcome your call at one of our offices.