I read an interesting article earlier this week by the famous economist, Robert Shiller, about the ways in which the market can manipulate and tempt us into making poor decisions. He argues that much like the unwanted emails and phone calls we receive from telemarketers (known as phishing), there are also aspects of the financial markets that are trying to dupe us into buying things we don’t really want or need. If you’ve ever tried to shut down your cable or internet service, you probably know the feeling. All you wanted to do was to switch to a better service, but by the end of the call, the customer service rep has spouted so much information at you and offered you so many different deals that you can barely remember your own name, let alone the purpose of your call. Thus is the danger of a volatile market like the one we’ve recently experienced. The longer it lasts, the harder it can be to remember what your strategy was in the first place and why you should hold to it.
When Cedarstone was first founded, we set out to be a firm built on the desire to care for and create value for our clients and when it came to our investment strategy, we saw no reason to change our goals. There are two commonly cited investment approaches in the financial world known as value investing and growth investing. While some have argued that there is little difference between the two – certainly you should invest both in something that’s valuable and something that you believe will grow – a recent study by the CFA Institute noted that more than 80% of respondents did think there was a difference between the two. The survey also noted that the most popular distinction was that value investors focus on fundamentals whereas growth investors focus on momentum.
When we talk about investing based on fundamentals, an easy analogy that comes to mind is sports. While I’m certainly no expert when it comes to athletic terminology, I do know that when the coach yells “FUNDAMENTALS” to his team, he’s reminding them to remember the basic skills of the game. He’s reminding them to use good form. Similarly, in investing, when we talk about fundamentals we’re referring to how healthy the basic skills of a company are – are they using good form? This means we’re looking for company’s that have consistent sales growth, are reinvesting for the future, and are reasonably priced based on their earnings. On the flip side, momentum investing means that you are investing based on recent trends that you hope will continue. If the market is going up, you jump in based on the assumption that you will believe it will continue to go up. The problem with this strategy, however, is that it can be incredibly difficult to predict when the tides will turn. The trend will continue in the same direction until it doesn’t, which is when most momentum investors find themselves in a world of hurt.
As the market continues to churn, we continue to be on the lookout for ways to add value, one of which is through the use of fundamentals – investing based on financial health and growth potential. If you’d like to learn more about the additional ways in which we seek to add value for our clients, check out this page or give us a call today.
Shiller, Robert J. “Fraud, Fools, and Financial Markets.” Project Syndicate. Sep. 17, 2015. http://www.project-syndicate.org/commentary/government-intervention-financial-crises-by-robert-j--shiller-2015-09
Voss, Jason. “Poll: What is the Primary Difference between Value and Growth Philosophies?” CFA Institute Enterprising Investor. Aug. 8, 2014. https://blogs.cfainstitute.org/investor/2014/08/08/poll-what-is-the-primary-difference-between-value-and-growth-investment-philosophies/