Staying on the Right Track


John Micklitsch, CFA CAIA, President & Chief Investment Officer

We can think of the world of equity investing as having two tracks that run in parallel but at times resemble completely different worlds. One track is the relatively consistent, long-term, upward-sloping trend of corporate earnings. The second track is the more winding and less predictable valuation path associated with emotions, fear, greed, the news cycle and interest rates. Like the bewildered parents of siblings who behave very differently wonder how the two can be related, the earnings track and the valuation track can befuddle even the most experienced investors.

Imagine, however, that you own a family business (as many of our clients do) and that business has served two or three generations with a steady stream of earnings that have grown over time, supporting family members in their life’s pursuits. The business is good at what it does and, if managed properly, will serve additional family members for generations to come. The bulk of time at family board meetings is spent on the long-term prospects and earnings power of the company driven by innovation, new products, solutions and services that will better position the business to succeed in the marketplace.

The family business described above is not dissimilar from owning a portfolio of well-run and capably managed public companies, either individually or through a fund. The main differences between the two are control and pricing. You have less control over a public company than you do a family business and publicly traded “family businesses” have prices attached to them virtually every minute of every day, which can distract from what’s important longer-term (not that you must act on that price). For reference, Warren Buffett has pointed out that Berkshire Hathaway has fallen by 50% three times during his tenure, but not once did he ever think of selling any of his interest. Mostly because the long-term earnings power of the business was far more likely to grow than contract over time and because his withdrawal needs were modest. Those two simple principles have been among the keys to his enormous wealth creation.

With most areas of the market currently either in correction territory (down more than 10%) or in outright bear markets (down more than 20%), we can speculate on what will cause stocks to regain their positive bias. Reasons could include signs of inflation easing, a resolution to the Russia/Ukraine war and China resolving its zero COVID policy. But the reality is that the market will regain its footing when participants exhaust their current fears and refocus on the long-term earnings power of their collectively held businesses and less on the prices that people trying to snatch those “family businesses” away from them are currently willing to pay.

As we’ve said before, the concepts behind successful investing, which include diversification, quality and time, are simple, but the execution of a long-term approach can be difficult, especially during times of market stress. Our mission at Ancora is to give you the tools, perspective and advice to be successful stewards of your portfolio of “family businesses,” so you can stay on the right long-term track.

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