John Maynard Keynes is a British economist credited with this quote in the 1930s. Over the years, I have written about evaluating investments through the quality of the business and the price we are willing to pay for it. Sometimes, as investors, we have to evaluate investment decisions beyond these fundamentals. Sometimes that requires admitting we are currently wrong and need to shift gears.<\/p>\n\n\n\n
We can all thank Keynesian economics for low interest rates\nand government stimulus in the face of increased unemployment and recession. He\npioneered the thought that demand influences prices more than supply. The quote\nabove references the fact that there are market forces that can drive returns\nbeyond what may be viewed as rational values. \nHe believed that government intervention could help push economic forces\nin a more positive direction to help support employment and economic growth. Arguably,\nthis theory has helped insulate recessions over the past 20 years from becoming\nall-out depressions.<\/p>\n\n\n\n
I started in the investment business in 1997, just a few\nyears prior to the technology bubble burst of 2000. In 1999 I started as an analyst for what was\nheralded in the 1990s as a prominent value fund. Value funds seek investments in quality\ncompanies that are selling at a price lower than the estimated value (think\nWarren Buffett). In contrast, growth funds seek investments in companies whose\nearnings are expected to increase at an above-average rate compared to their\nindustry sector or the overall market.<\/p>\n\n\n\n
1998 and 1999 were not attractive years for value\ninvesting. Every high-flying growth technology company employee was dreaming of\nretiring before the age of 40, and general investors were shunning traditional\ncompanies in the face of new technology geniuses such as pets.com. Billions of\ndollars flowed from value investments to growth investments, driving many value\nfunds out of business. Warren Buffett was generally viewed by many as an old\ncoot who couldn\u2019t keep up with the times. \n<\/p>\n\n\n\n
Although the investment group I worked with lost more than\nhalf of its assets as money flowed to growth managers, the fund stayed in\nbusiness through the technology bubble growth and burst. As technology stocks\nplummeted in value in 2000 and 2001, the stocks in our value funds held up much\nbetter and far outperformed the bubble-bursting growth stocks. Relative\nperformance was strong again.<\/p>\n\n\n\n
So, billions of dollars flowed right back into the fund as\ninvestors who left acknowledged they were wrong. Right? Umm, no. It just\ndoesn\u2019t work that way. Money eventually flowed back into value funds. However,\nnever at the significant rate, it moved out. And, most likely those investors\nmoved back to value funds after value funds booked significant market gains.\nJust as many of them moved into growth stocks in 1999, after these stocks had\nmade most of their money. <\/p>\n\n\n\n
So, what lessons did I\nlearn from this early in my career? <\/p>\n\n\n\n
I\u2019m not a big fan of\nadmitting I\u2019m wrong. Maybe you can\u2019t relate. But, in general, I don\u2019t think any\nof us like to admit it. Being in this business for over 20 years, the other lesson\nthat every investment manager learns is that the market can be more humbling\nthan we like to admit. All we can do is evaluate our decisions and try to\nunderstand what we did right and how we can improve our thinking.<\/p>\n\n\n\n
There have been many very positive investment decisions\nover the years that have added to client values. But, sometimes cutting the\ncord on an investment that hasn\u2019t worked can be a very good decision. <\/p>\n\n\n\n
A trade was made in\nclient accounts on October 1st to sell all direct holdings in the energy sector\nand purchase a consumer staple ETF with the funds. <\/strong>For over five years I have evaluated large energy stocks,\nsuch as Exxon Mobil and Chevron Texaco, as selling at stock prices that are far\nbelow their respective value. <\/p>\n\n\n\n I remain steadfast in\nmy belief that these large energy companies came into the oil price downturn\nwith enough cash and company strength to weather a sustained low price in oil.\nI also believe these companies are investing in \u201cgreen\u201d technologies and have\nthe size and strength to capture this market when it is economically viable to\ndo so. And, oil and natural gas will still be a staple for global energy needs\nfor many years to come. Current stock prices reflect continued, significant\ndegradation in earnings value that may or may not be realized.<\/p>\n\n\n\n What I believe was\nsignificantly underestimated in my research was the impact of the \u201cgreen\nenergy\u201d movement perception on investment flow. Socially responsible investing\n(SRI) has had a powerful impact on investors and the companies they are looking\nto invest in. Environmental protection has become a hot topic for many large\ninvestment organizations. I believe that for all the positive flow \u201cgreen\nenergy\u201d companies like Tesla have received, the large energy companies have seen\nnegative flow.<\/p>\n\n\n\n How long can this last?\nAccording to Mr. Keynes, we could see this trend for much longer than may seem\nreasonable from a valuation perspective. At this time it doesn\u2019t seem prudent\nto fight the SRI wave and continue waiting when there are other perfectly good\ninvestments we can take advantage of.<\/p>\n","protected":false},"excerpt":{"rendered":" John Maynard Keynes is a British economist credited with this quote in the 1930s. Over the years, I have written about evaluating investments through the quality of the business and the price we are willing to pay for it. Sometimes, as investors, we have to evaluate investment decisions beyond these fundamentals. Sometimes that requires admitting […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"","_et_gb_content_width":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[122,119,123],"tags":[],"class_list":["post-6532","post","type-post","status-publish","format-standard","hentry","category-financial-planning","category-market-commentary","category-market-performance"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p7kXxe-1Hm","jetpack-related-posts":[{"id":6509,"url":"https:\/\/schenkelberg.investments\/?p=6509","url_meta":{"origin":6532,"position":0},"title":"Financial Planning During a Volatile Market","author":"J.J. 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