The Fear and Opportunity of Shakeouts

We decided several years ago that when talking with prospective clients, we needed to broach a particular topic.  Simply put, it is this:  Our very best stocks have periods when they fall.  Whether you refer to this as a pullback, a correction, a dip, or a shakeout, it still means the same thing. They go down in price.  This deterioration from a high point may last only a week or so, but frequently it can go on for six months or more before rising and surpassing its old high. We are referring here to the investments which have proven to be our best and continue to give us long-term growth. 

Let us use Paypal Holdings as an example.  Those of you who are clients in our growth portfolios will be very familiar with this company.  Four and a half years ago, in February 2016, when we made the original purchase, the price was around 36 dollars a share.  Two years later, in March of 2018, the value was 86.  Three months after that in June, the stock had dropped to 70, and it did not meaningfully exceed the 86 dollar mark until early January 2019, February 2020 the price was 124.  Then the COVID scare came along and sent the stock to 82.  As I write this the stock is around 241, and in February 2021 sold for over 309.  Stated a little more succinctly, Paypal has advanced from 36 to a current price of 241 in about six years, or almost 7 times the original investment.  

Using the Paypal example above, in the last five years its average growth rate has been 26% a year, the current return on equity is 25%, and the 2022 analysts’ consensus earnings are projected to show a 24% increase.  We continue to watch factors like long-term debt, quarterly increases or decreases in sales, competitive environment, or any other changes that affect our buying and selling decisions.

The reality is this:  We do not believe you can find a single stock which has shown a major multi-year advance without sometimes having periods of sizable drops.  All stocks, regardless of strong growth, have periodic declines.  While using the example of Paypal here, we could easily substitute the names of Nvidia, Epam, Facebook, Etsy, J P Morgan, Walt Disney, or for that matter, any company which has shown an extended multi-year advance.   Downturns are always frightening, they invariably shake out numerous worried investors, and they routinely occur.

We are aware, there are stocks that investors would be wise to avoid for decade long periods.   There are companies whose products or services have become outmoded, or economic circumstances change, and the stock is no longer a viable investment.  Twenty years ago, General Electric sold for 60.  It is currently 13.  In the same 20 year period, Ford has gone from 42 to 12, and we all know the story of Sears and Eastman Kodak.  Therefore, we must continually monitor investments.  This is our job as we work for you.  Will we miss or be in error sometimes?  The answer is yes, however, we gauge success by being on the right side the majority of the time.

We all know that 2020 was a terribly difficult year for so very many people in so many respects.  Despite all the difficulties brought on by COVID, it was generally a pretty good year for stocks.   While March of 2020 gave us a sharp selloff in almost all sectors, May of last year witnessed certain growth stocks start a slow, but steady climb, and they spent the remainder of the year climbing, several making new all-time highs.

In early January we held our first Sara-Bay portfolio meeting of 2021.  These are periodic reviews when we meet to evaluate our current holdings and discuss overall strategies.  At this first of the year meeting, we considered, not just the possibility, but the probability of a correction, simply because of the strength in our portfolios over the last several months through the end of 2020.  We agreed that a pullback was likely to occur, not just in the stock market in general, but in the value of technology stocks.  Our growth accounts do contain several tech stocks, as well as companies which tend to move in concert with the techs.  For several reasons, which I will not detail here, we made the decision to stay with our portfolio holdings, with the possibility of occasionally trimming back if we needed to rebalance some accounts. We also discussed some candidates for possible future purchase as funds became available.

It is not our policy to sell, then try and buy back on a short-term basis.  First, about half of our accounts are not in qualified accounts (IRAs, 401Ks, ROTHs, etc.).  This means the holding period of one year to qualify for long-term capital gain tax treatment would start over again.  More importantly, we would need to be extremely accurate on short term market movements.  It is always easy to make a perfect Super Bowl call on the day after the game was played.  We hate to dispel your faith in our precision, but frankly, we are not that good.

It is important to remember that in the short term, the market is not logical or pragmatic.  It runs on emotion and shoots from the hip! Thankfully, that is not true of the long-term, as earnings and growth prevail.  Our job to is keep focused on your long-term goals and to avoid undue risk.

Epilogue (and an important one):                                                                                                                  At the end of June, Barbara, who has been with us for 25 years will be retiring.  All of you who have worked with her are aware of her calm, composed demeanor and her persistence to see a problem through to its resolution.  We have often said that Barbara has been the sea of tranquility in occasional tempestuous waters.  

Why Barbara is choosing to move to Virginia Beach to be with her daughter’s family and her two very lovely granddaughters rather than to stay here in the daily grind with us is beyond our understanding.    We have promised to phone her frequently as problems arise, which we are sure is a great relief to her.  Barbi has been an integral part and true asset of Sara-Bay for so many years. She will be genuinely missed.

We are enormously pleased that June Robins has agreed to join us effective two days ago, May 17th.  June, originally from Buffalo, New York, has been a resident of Sarasota for 18 years.  She spent 13 years with Northern Trust Bank holding the position of Senior Wealth Management Associate for the last nine years. She has a comprehensive understanding of all types of securities, as well as widespread knowledge of trusts, individual accounts, and the variety of IRAs.  We have also detected a sparkling personality.  Welcome, June! 

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