Investment Climate: Get out of the "Market"??

The Fed didn’t raise rates and the market still had a fit.  Many continue to say the next crisis is upon us, as they have for years now.  Europe is a mess.  China is collapsing.  The Middle East is a bigger mess.  Politics is…well POLITICS!  And, about the market?  Get out!

Our longest term clients, those who have been with us since the beginning 30 years ago (we still have our first client), have just been floored by that statement!  They’ve never heard us utter such words.  They are thinking we’ve either lost our minds or spent too much time in the beautiful California Central Coast sun and it has baked our brains.  But we really think this call is long overdue.  If you have bought into the market, then we do feel it is high time you get out.  Instead, invest in businesses.

Okay, now our clients are starting to feel a little better.  It’s the old Taylor Frigon mantra about to hit you square in the eyes. 

But it is true that we believe it is time to get out of the market, if it’s the market in which you think you are “investing”.  We’ve all heard, ad nauseam, the line that most “active” managers don’t “outperform” the market.  This is the biggest lie ever perpetrated on the investing public in the history of investing!  Active managers ARE the market.  The “just buy the market” crowd has survived on what our good friend George Gilder describes as “parasites living off of the backs of active managers.”  Think about it, taken to its fullest extent, if everyone “indexed” (as the phenomenon is called) there would be no market.  Who would be responsible for price discovery, the government (scary thought)? Or the corporations themselves (talk about the fox guarding the henhouse)?  Along that line of thinking, the hysteria over indexing has reached such heights that there are those who have suggested that the very execution of “active management” is somehow promoting socialism.  Huh???!!!

It has grown in acceptance because Wall Street has abdicated responsibility for making investment decisions to the few, mass-managed money behemoths who dominate the so-called “active” investment management world.  Like in so many instances Wall Street, in general, is a victim of its own success.  It is simply too big to be able to adequately “manage” anymore so it has gone completely to financial engineering and trading on the institutional side of the business, and “wealth management” (financial planning) on the retail side of the business.  They simply aren’t training people to make real investment decisions.  By investment decisions, we mean, which companies deserve to have one’s capital.  We do not mean, which mutual fund or ETF should one buy, or to which active investment manager (like Taylor Frigon) should one outsource investment decisions.

Gone is the era of the “stockbroker”.  A much maligned figure that once stood tall in the world of managing money for people.  Yes they picked stocks, and yes they made their money on commissions for selling stock to their clients.  But, back in the day, good stockbrokers did research…real research.  They analyzed companies and made recommendations to their clients that they believed would make them money.  They followed the companies they had invested in (and the good ones invested their own money in the same companies as their clients).  And those that lasted in the business made their clients, and themselves, money.

While we subscribe to a different model of how we get paid today (an asset-based fee), which we feel more closely aligns with the client, we were fortunate to have learned our profession from one who was cut from a similar mold.  Richard Taylor was mentored by Thomas Rowe Price in the 1960s and learned how to buy businesses.  At that time, that is all you did if you were in the business of investing other peoples’ money.  The concept of buying the market was nascent, at best.  Thomas Rowe Price believed that the great fortunes that were made in this country were “made by men who retained ownership of great businesses, through market cycles”.  It is with this concept that we feel true investment strategies can be built.

Contrary to what many would like you to believe, this is not rocket science!  It is simply tedious, time-consuming and requires nerve, or a strong stomach, as the case may be.  Anybody can do it if they commit to a disciplined thought process.  Those who don’t can still hire people like us to do it for them.  While this may sound overly self-serving, it is meant to emphasize the point that part of the problem we believe exists in the financial world today is that most people have gotten too distanced from the investment decision-making process.  We believe this has ramifications for the general market and has held many companies back.  However, we think that it is changing and it will become more important than ever to be diligent about investing in businesses and not just blindly buying the market.  And this will not manifest itself in a massive crisis, but a slow burn that will cause one to wake up many years from now and either be bewildered by the lack of return in the “market”, or be comforted in the knowledge that you owned some great companies and built your own fortunes very nicely.
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