The Questions we Get and the Question We Want
All of our clients know that we are pretty strict about having at least one face-to-face (or screen-to-screen) meeting with them every year. These Annual Portfolio Reviews or APRs are important for lots of reasons. We get to see how our clients are doing, financially, physically, and emotionally. Those three things help us determine the optimum levels of risk, required portfolio growth, and portfolio composition for each family, because we recognize that each family and each investor is unique. For our clients, the annual meeting provides a chance to ask us questions about whatever they have been worrying about. Here are the questions we have been getting most frequently in 2023:
- Are we going to have a recession?
- When will interest rates start to come down?
- What are the stock markets going to do for the rest of the year?
All of these are important questions and the answers to them will certainly be important in determining how well an investment portfolio will do in 2023. But the answers to these questions are highly uncertain. The best economists are split on all of these issues. We have our opinions, which we think are solid and well thought out, but we are not so arrogant as to think that we will always get the answers right. There are simply too many variables. So we answer as best we can, but not generally with a high level of conviction. Telling the future is just too hard.
Here is the question we wish our clients would ask more often: How are the companies in my portfolio doing?
The price for any individual stock is based on only two things: the earnings of the company, and the value the market places on those earnings on a forward-looking basis. The first input, the actual performance of each company, is what we focus on. We have a quite rigorous and disciplined process for monitoring and analyzing all the companies in which we have invested. We read quarterly earnings reports, listen to the company-hosted conference calls, and read commentary from other market participants. For us, success means buying companies that consistently meet or exceed their earnings targets and often, raise their dividends. My partner Barry Schwartz calls these companies “compounders” because they are able to grow their earnings each year, becoming more and more profitable as time goes by.
The second input, the value the market puts on those earnings is out of our control. It is based on sentiment and emotion. When times are bad, or when interest rates are very high, forward earnings are not highly valued, and stock prices go down even when earnings are good. (Technically this is known as “multiple compression”). When people are happy and the economy is strong, the value of forward earnings rise, and multiples expand. Warren Buffett’s oft repeated explanation: “In the short run the market is a voting machine; in the long run it is a weighing machine.”
When our clients ask us how the companies in which they have invested are doing, I am happy to answer: Mostly, very well. We are just about through earnings report season for the 1st quarter. The great majority of our companies have met our expectations. Many exceeded them. Dividends have been raised, none have been cut, and although the outlook expressed for the balance of the year has been in many cases quite reserved, none of our companies has expressed panic, dismay, or discouragement. In short, we are pretty happy with the companies our clients own, and we are not persuaded to make any significant changes.
A popular aphorism has it that the key to happiness is to worry about the things you can control, and not worry about the ones you cannot, and to know the difference. We can’t change market sentiment, but we can and do pick good investments. Clients who concentrate on the latter and tune out much of the former are happier and calmer investors.
Long Term Investing Podcast with Barry Schwartz