Monthly Bulletin November 2022
Attached please find the monthly report, in which we share our views on conditions in the financial markets.
Monthly Bulletin: Price Fluctuations Versus The Long Term
I was recently approached for an interview by the website Let Us Compound. This included a focus on Tresor Capital’s investment philosophy, its approach around family holdings, reasons to sell, and stock market sentiment.
The price fluctuations in recent months and the sentiment surrounding them is a hot topic of interest for several of our clients. We would like to share an excerpt from this interview with you in this monthly report. You can read the entire interview by clicking here.
Let Us Compound: “In current times, many investors are dropping out. How do you deal with that within your job? Do you try to change people’s minds? What are your arguments?”
A: In our customer conversations, our monthly report (available for free on our website) and our weekly newsletter, we try to encourage customers to keep the focus on the longer term.
In the short term (less than two years), it is mainly sentiment and valuation that influence stock price movements, in the medium term (two to three years) it is the development of the economic cycle or the industry, in a term of more than three years, the return on invested capital is decisive, and in the very long term, corporate culture plays a crucial role.
We select only companies with rock-solid balance sheets and relatively little debt (often even a net cash position), strong market positions and sustainable competitive advantages in attractive niches (a moat) that have pricing power.
So rising interest rates or high inflation have limited impact on these companies, but sometimes stock prices seem to reflect a completely different picture than the fundamental reality.
For example, companies are unfairly considered cyclical, or belong to a particular sector that is under pressure, resulting in selling pressure for all components of a particular subsector (this is where passive capital flows then play a role). In short: the stock price does not reflect reality.
In the long run, it is not sentiment but fundamental reality that plays a decisive role. Graham said, “In the short term the stock market behaves like a voting machine, in the longer term like a scale.”
So we try to make our clients understand that the real risk, that of permanent capital loss, is minimized with our carefully chosen selection. Price fluctuations, volatility, only show the emotion, it is only a short-term mutation.
We are here to unburden the client, so our main job is to help the client see past the emotion of declining rates.
In the fourth quarter of 2018 and the first quarter of 2020, prices also fell sharply, which is one of the characteristics of financial markets. Only to then show a sharp recovery, with fundamentally strong companies pulling the cart. Therefore, the relationships that have already experienced these periods are already well able to accommodate the current turbulence.
If you have any questions or comments about this e-mail or other matters, please kindly contact us using the details below.
Sincerely,
Michael Gielkens, MBA
Partner
