April 5, 2017
First, some positive bookkeeping. Schwab has graciously lowered their fee per trade to $4.95 –virtually free (they also gave us a break on recent mutual fund purchases). Ten years ago, we could have paid $300 for a trade that now costs $5! If you are not receiving this fee, it means that you have not signed up for electronic statements and confirms (after much urging).
If you had plenty of liquidity in your account in late February you saw that GCM made a move into fixed income, purchasing Vanguard Intermediate and Vanguard Short-Term Bond funds (unless you have a foreign address or had a current need for your monies). This move followed my February 12 th letter that hopefully you’ve digested. Approximately 10% of GCM’s money under management was placed in these two funds. My opinions laid out in this letter have not changed one bit. A month after publishing my sentiments, the front page of Barron’s Magazine boldly warned Trump to kill any border taxes before it KILLS US.
After realizing the cost of buying mutual funds for clients (it’s been 20 years), I called Schwab to protest. They informed me that since GCM is good for Schwab’s financial results, they agreed to charge us NO commissions for buying and selling these two funds.
“It is unwise to be too sure of one’s own wisdom,” Gandhi said. “It is healthy to be reminded that the strongest might weaken and the wisest might err.” Einstein took the idea a step further: “A true genius admits that he/she knows nothing.” Smarter and humbler people than me were willing to say, “I don’t know,” and it is okay for us mortals to say it too. Repeat after me . . .
It pays to have nerves of steel… (but I still do not own a crystal ball) Most advisors who recommend smaller-cap, value stocks are unwilling to hold them through thick and thin. Though these value oriented advisers have longer holding periods than most others, their average currently is 18 months. The average holding period of GCM’s currently held stocks, by contrast, is five years. There have been many times during our history when the average holding period was even longer.
By selling out too early, other advisors find themselves with either one or two strikes against them. The first strike applies even if those advisors immediately reinvest the proceeds of their premature sales in other undervalued stocks: They still leave too much money on the table, since it can take years before the market finally recognizes the potential of previously undervalued stocks. The second strike is when advisors go to cash after selling. These advisors often end up bailing out of stocks near the bottom of bear markets. Because it almost always takes them a long time to get back into equities after the market begins to recover, they enjoy only some of the market’s recovery after suffering the bulk of its decline—and therefore lag the market over the long term. By not deviating from our commitments to companies, we sidestep both strikes. We’ve had many occasions to celebrate victories but it has also caused disappointment. Two recent examples:
We bought Dot Hill in 2010 for approximately $1.50/share. We could have sold it in 2012 for $.85
but instead, we bought more. We kept most of the shares until they were purchased for $9.75/share in
2015 – a five year holding period.
We erred with Uni-Pixel though. The stock ran up seven-fold and we did not sell after owning the
company for one year. We did however take most shares off at 2.5x. In hindsight, holding this for
the longer-term was a mistake because we erred in taking management at their word.
Many investors no doubt find it boring to remain fully invested through thick and thin and to hold stocks for many years. In fact, one of the most challenging parts of this job is continually finding new and interesting ways of saying the same thing: Remain focused on the long term with patience and discipline.
Another point: Don’t be put off by the price of a stock price because it has nothing to do with a company’s valuation. Rather, focus on the stock price relative to earnings, sales, and book value, when relevant. I’ve had clients over the years suggest that I sell or buy a company we own based on the current movement of its stock’s price. Ironically, it’s often the opposite of what I would do. A final rule for picking stocks? Patience. It can take time for the market to come around to your thesis. Trading in and out of shares is rarely a formula for success.
We lean towards caution. As growth-at- a-reasonable- price investors, we don’t put money to work because we have money, we put money to work because we have attractive opportunities. Over time, small companies tend to grow faster than large companies, and depending on one’s risk tolerance, portfolios should have a healthy balance of attractive large company stocks, as well as smaller companies that exhibit above average growth characteristics.
For me, it’s not how much time I spend doing what I love. It’s how little time I spend doing what I hate.
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.