SM Carlton Advisory

Before I comment on the doom and gloom engulfing society, I will share a primer on the overarching premise of my investing strategy: owning quality, well-run companies in industries with years of growth ahead which will result in returns that outperform the S&P 500. The American stock market has been one of the best engines of wealth creation over the past 100+ years that the average retail investor has access to. Up until recently, there wasn’t a rolling ten-year period that experienced negative returns. That statement still holds true for twenty-year holding periods. Why is that important to note? I believe this proves that returns are earned through patience.

How many investment strategists have you spoken with, or read about, that focus on investment time horizons of longer than five years? Ten years? That is a key ingredient to my “secret sauce,” that I bring to the table: patience. Despite being 31 years young, I have been investing for the past 14 years including throughout the 2008-2009 Financial Crisis and resulting “Great Recession.” My returns speak for themselves: an annualized gross IRR of 13.07% handily beats the 6.96% return of the S&P 500 (including reinvested dividends) over the same time frame - May 2006 through March 2020.

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Q1 2020:

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The first quarter of 2020 has ended, and it is officially the worst 3-month period since 1987, and the biggest decline in the S&P 500 EVER (since its inception in 1957). There are countless examples of even scarier headlines, but there is no need for me to instill additional fear in anyone’s heart.

The COVID-19 outbreak is like no crisis the markets have ever seen. To be frank, I’m not sure there is a comparable crisis in history. The global interconnectedness of commerce and trade, the speed of communication at record highs, combined with dysfunction at the highest levels of the US government does not bode well. However, does that change my philosophy? Absolutely not. Taking a step back from the horrific loss of human life the world is seeing, I am optimistic that society will recover from this. Do I know when? No. What I do know is that the incredible gyrations in market pricing over the last few weeks indicates nobody has confidence in near term forecasts. We have seen headlines noting the biggest single day drop since 1932, and the largest single day gains in just as long. All within the span of two weeks. To me, that represents opportunity.

The market is full of myopic traders trying to squeeze gains out of short-term “price dislocation” and use complex algorithmic models combined with massive computing power to execute high-frequency trades. Many of the largest mutual funds must adhere to strict allocation strategies to comply with investment policy and attempt to limit losses in the short term. These actions, along with a myriad of other factors contribute to the entire market moving in unison. Quality companies experiencing short-term pain get hit hard. Others get dragged down seemingly without reason. I prefer to “zoom out” and expand my perspective to see which companies will make it out on the other side of the crisis, potentially in a stronger position than before.

I am an investor in companies, not a “buyer of stock tickers.” Based on my understanding of the economic environment, the specific sector, and various valuation metrics, I seek to purchase positions in companies that I believe hold long term value. Sometimes that means paying a premium. Sometimes buying at a discount. The longer the investment is held, the smaller the importance of the initial purchase price becomes.

I will never pretend to know how the market will perform in the next month, quarter, or year. However, I have found that buying AND HOLDING, quality companies gives you the best chance to weather any storm over the following five-, ten-, twenty-year periods and beyond. Holding investments during turbulent economic times and alarming news cycles is not easy. It does not feel good to see companies you’ve purchased decline in value by 50% or more. It never will.

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What’s Next:

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It is important for me to point out that outperforming the S&P 500 does not mean positive returns every year. The stock market, on average, declines one in every three years. But if you believe in me and my philosophy you will be rewarded over the long term. For that reason, I believe the only funds that should be in the market are those that don’t impact your daily life for the next three years. It is the best protection to deter you from the instinct to sell when times are hard.

Buckle up everybody, it’s going to be a bumpy ride over the next several months! I hope you all are staying safe and healthy, and that I will get to share a drink or a meal in person soon.

If you have any specific feedback for what you would like to see in my commentary, please write to me. As a first attempt, I am sure there is much room for improvement! Hopefully the next commentary will have details about how the country has successfully battled COVID-19 when I send it out over our nation’s Independence Day.

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Be well and stay safe,

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Samuel C. Muffly

Founder & Chief Investment Officer

SM Carlton Advisory LLC