Dave Canal's blog

Market Update

January 14, 2016

We are sending this note to give you our perspective on the recent global market turmoil and volatility.  We realize these periods can be very unsettling and stressful.  It’s difficult to keep your cool when the 24/7 news cycle is on high alert as these events unfold.  While there are legitimate concerns about the global economy, we believe the pessimism is significantly overdone.

The investment world offers a choice between two different investment approaches.   However, one has to be aware of what the choices are.  Each has a time when it is the appropriate style.  The first is a “top down” process based on macro events.  It is the process virtually every professional money manager uses. The second is micro.  Micro --- as the word suggests --- is based on company specifics.  It works best in a period of rising interest rates … something that hasn’t happened for 35 years.

Today it is difficult to imagine an active portfolio manager having the aura of a rock star.  But in a period of rising interest rates (1945-1982) it did happen and will happen again.  After all, who wouldn’t regard someone with respect who could make them money by outperforming the stock market?  Today the common wisdom is that it can’t be done and one should buy ETFs (exchange traded funds).  Not appreciated is that rising interest rates can reflect prosperity while declining interest rates often reflect economic difficulty.  

From the moment I entered the building I knew that I was in another world.  The building was the Burbank headquarters of Warner Brothers Studios.  My host, Joe Smith, was President of Warner Brothers Records and our meeting had been arranged by a mutual friend from Boston.  Joe was a major figure in the music business and was eager to show me some movie lots before we had lunch at the studio commissary.  We were an odd couple as we walked the studio grounds!  I was wearing a Brooks Brothers suit, button down shirt, and striped tie.

“Which do you think is more important, the jockey or the horse?” a friend asked years ago.  Now I have friends who have become clients and clients that have become friends.  This man was one of the latter.    At the time, my friend was the senior executive of a major corporation.  So I surmised that this was a metaphoric question and that he was postulating a company’s business was the horse and the “jockey” was the CEO.  If so, it was a provocative and moot question!

To recall a lunch from 37 years ago, it has to have had an emotional impact.  This one certainly did.  I remember feeling somewhat despondent as the lunch began.  The guest speaker was the Chief Financial Officer of Toys R Us.  At that time, the toy retailing industry was an eight billion dollar business.  Toys R Us with $250 million in sales was the largest company.  I had bought the stock at ten dollars and as I sat at the lunch … it was at five dollars.  That reality would have made anyone despondent.

The Contravisory staff donned their hard hats and tool belts to help our local chapter of Habitat for Humanity.  Our team spent the day working on Habitat's latest site build in Hanover, MA doing a host of activities including painting, hanging drywall, and cleanup.  It was a long day of hard work but filled with lots of fun, team-building, and a sense of accomplishment.  "It's always nice to take some time out to help a great cause like Habitat for Humanity", said Contravisory Bill Noonan.  "We are thrilled to have played a part in what will undoubtedly be a life changing event for a worth

It’s interesting to hear “experts” in the oil industry expound on the future price direction of oil.  Often these interviewed experts are the CEOs of major oil companies.  Many say the current price of oil ($50 a barrel) is temporary and will eventually trade back toward $100.  But not one was prescient in forecasting the recent 50% decline.  So what qualifies them to now predict a rise?

“In seeking to avoid the dangers of crowd action, remember that a majority opinion can be sustained.  Unanimity of opinion is more vulnerable to a contrary surprise.”

The quote above is from Contravisory founder Ed Noonan’s 10 Rules for Investing.  Considering the record amount of anticipation and speculation surrounding the recent Facebook IPO and the subsequent disappointment, this seems like a particularly good time to revisit this rule.