Market swings may feel like adequate reason to scrap everything and start over. We are monitoring your goals first and foremost and making sure that your portfolio is appropriate to put you in the best position to meet them under all vicissitudes, both good and bad.
“It is easier to find men who will volunteer to die, than to find those who are willing to endure pain with patience.”
“Many shall be restored that now are fallen and many shall fall that now are in honor.”
Croesus was the last king of Lydia around 560 BC. We have written of Croesus before in our discussions about Money because his name was once synonymous with wealth as the Lydians were the first society to mint coins. After Croesus had conquered Anatolia, all the wisest men of antiquity traveled to see him and sing him praises. Among the visitors was Athenian statesman, Solon. As Croesus gave guided tours of his vaults, he asked Solon “Who is the happiest man that you know?”. Solon replied dryly that the late Tellus was the happiest man that he is aware of. He had lived in a stable country, was neither rich nor poor, had sons and grandsons who all lived incredible lives, and were all lucky enough to die heroically in battle. Croesus was not satisfied with Solon’s declaration that an unknown man had outranked him in happiness, but demurred and asked who was in second, ready to claim his prize. Solon named two other unknown youths who had died heroic deaths and were elevated among their people.
Croesus could no longer contain his irritation. He asked Solon how he could possibly not think Croesus was the happiest man alive. Solon, known for his integrity, admitted that Croesus was very rich, but told him that no man can be said to be truly happy while he is alive, for as long as a man draws breath, he is subject to the whims of the gods and many wealthy men have died disgraceful deaths and gone from blessed to cursed. This exchange enraged Croesus who thought Solon a jealous fool. He sent Solon away and let the offense slip his mind.
Soon after Croesus dismissed Solon from his kingdom his favorite son was killed in a hunting accident, and on the same day Cyrus the Great, King of Persia attacked Sardis, the capital city of Lydia. As Croesus was burning to death in his palace, he remembered the words of Solon. He screamed aloud “O, Solon, you true seer! O Solon, Solon!” These final words intrigued Cyrus, who called to have Croesus saved and asked him what importance could cause him to cry these words aloud at his end. Cyrus was so moved by Solon’s words that he pardoned Croesus and made him an advisor and the two became lifelong friends. This legend was recounted by Herodotus, in his Histories. While it is likely that the story has been embellished over the eons, the message remains just as powerful about judging a game in progress without seeing the end. As the lead quote suggests, many of those who are now respected will be relegated to the dustbin of history.
“Are we there yet?” Dreaded words from the backseat known well to any parent driving two young girls to a theme park on a summer morning. The anticipation rises and the bickering intensifies. A similar phenomenon occurs when the market is volatile and key allocation decisions are being made. The important distinction is that we have no destination within view in investing, we only have mountains of time to endure; some of these moments will be painful. We will work our way through this crisis, reap the rewards of our patience, and then we will prepare again for the next one. The lack of finality is one of the hardest parts of investing- the work is never done. Our skill level can never be truly judged until the sand is between our toes and the sun is in our face permanently, and the next generation has taken the reigns. It is said that Benjamin Graham remarked in his 70’s from his retirement home in the South of France that he hadn’t looked at markets in years. At this point in his life, he had become a great investor.
So far in this correction, our performance has been very good. There is no time to rest on our laurels and admire our work because as pockets of volatility arise, some of our securities are becoming overvalued and other securities that we own (and some that we don’t own)- are presenting themselves as better alternatives. It is said that there is no security so poor that it would not make a good investment at some price. As the bubbly technology stocks deflate, some of them that have earnings and revenues are starting to enter a range where we would consider them for future investments. While we are not quite “there yet”, your investment team has our eyes on what is available and what we own.
We are at an inflection point where very subtle changes could be made in our allocations. This will not happen quickly, but in general there are some changes that will start to be phased in as we rebalance portfolios. We entered this correction at over 13% cash. We had a 5% position in equity energy and a large position in alternatives that have produced a 4% positive return so far to counterbalance the drop in equities. We had very short-term, high credit quality bonds, and our equity position was highly skewed toward value. Below are a few of the changes we are currently evaluating for the next couple of months.
We may begin to reduce cash very subtly. As equities become more reasonably valued, they offer much higher future returns even if we encounter volatility on the way. While we have avoided the majority of this downturn, our goal was not to reduce volatility, it was to achieve high returns over the long-term and security prices were too high in our humble opinion. We will not try to find a bottom in equity prices, and as we start to add more equity, we will experience a little more volatility in the quest for higher future returns. We are looking to reduce our current cash position by about 2-3% given the current circumstances. If equity prices rise or fall, this number will change as appropriate.
We are looking to begin the slow exit of our equity energy position. We are up about 25% year-to-date and with the price of oil already at $125 per barrel, we would be positioned for calamity if we continued to hold. We bought on valuation, and we will sell on valuation. We never try to hold out for the final nickel. We may still add a couple of individual energy stocks, but we will be more diversified in energy than just oil and may look to add producers of metals as well. These securities have already appreciated significantly, and they may become overvalued before we are able to add a full position.
We will increase our general equity mutual fund positions. Our international equity funds are down approximately 10% and our Large Cap growth funds are down double digits. These funds were not significantly overvalued heading into this correction and if we liked an investment at $1, we should like it even more at $.84. We will not rush in; we will be patient and make sure that we have adequate liquidity to continue buying if the market continues to give us better and better prices.
We have access to many more individual stocks that meet our criteria for inclusion. Our list is not nearly as robust as it was in April 2020, but it is much better than November 2021. We will scale-in to individual securities as the prices continue to soften. We have identified a few technology stocks that are down over 75% that are starting to offer the potential for high future returns. If these prices continue to be depressed, we may begin to add a few positions. We will only buy securities that have real revenue and for which we are able to calculate an approximate value. Being down 80% is not the magic formula for becoming an investment.
Before I close, I’ll make one comment on the fate of technology stocks that have declined precipitously. An important distinction must be made between the words “indefinite” and “permanent” when discussing losses. While indefinite may mean that hope remains that former glory will be relived, permanent means that things will never be the same as they were. Our fear is that given the information we have many of these technology stock declines will fall into the permanent camp; these are the situations we fear most, and the ones that we will try to avoid. But as we all know, only time will tell.
Our team understands the gravity of the trust that you put in us, and we manage your money as though your well-being depends on it. Which it does. Many of the decisions that we make will turn out to be fortuitous, some will turn out to be wrong. This is a function of making decisions based on limited information about the present and zero information about the future. What we ask is that you judge our process and our intent, and not blindly monitor short-term results. This is a very long game that we are playing, and victory can seemingly be turned into defeat very quickly if we do not carefully monitor what we own, and subsequently can be turned back into victory. There is no final tally until the very end.
Thank you for your trust and your patience. Market swings may feel like adequate reason to scrap everything and start over. We are monitoring your goals first and foremost and making sure that your portfolio is appropriate to put you in the best position to meet them under all vicissitudes, both good and bad. As circumstances change, our minds will change. We will keep you updated as frequently as we would like to be updated if we were on your side of the desk. Please do not hesitate to contact us if the market pain keeps you up at night.
Warm Regards, Allen
W. Allen Wallace, CFA
Chief Investment Officer
Basepoint Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.