Client Letter – Q3 2015

Welcome to your second online quarterly letter! For emphasis, I am going to repeat the first paragraph from our previous quarterly letter, where we announced our new reporting and billing process:  “Your quarterly reports and bills can now be found in the Orion folder in your eMoney Vault.  We have also moved your documents from Sharefile to eMoney. Your new and improved quarterly report includes an activity and performance summary, a list of your investment accounts, 2 pie charts that show your asset allocation, a portfolio detail report (similar to the former “holdings report”), and your fee summary.  Finally, your report shows the “time weighted return” (TWR) instead of the “internal rate of return” (IRR), which we are happy to discuss in greater detail with those of you who want to dig deeper into the mysteries of financial return calculations.”

The third quarter was difficult for investors, with wildly fluctuating stock and bond markets moving in schizophrenic reaction to major news and inconsequential Twitter postings. In times like these, rational investors might want to turn to Benjamin Graham, the father of value investing and Warren Buffett’s teacher, for advice.

In his classic work “The Intelligent Investor,” Graham told investors that they all have a regular partner in managing their portfolios, a rather dodgy fellow known as “Mr. Market.” On any given day Mr. Market is happy or sad, enthusiastic or scared, and he continually gives each investor new quotes on their portfolios at which they can buy or sell. The problem with Mr. Market, however, is his reliability: occasionally his quotes seem to reflect the facts and prospects of the investments you own, Graham wrote. But much of the time “Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.”

This may be one of those times that we should ignore Mr. Market. As Wall Street Journal columnist Jason Zweig noted in his commentary on Graham’s book, “Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels?” Assuming the answer is no, then you should also not be swayed by the frantic talking heads on the financial news channels who scream “Sell!” when the market is down.

World stock markets went down this past quarter on the serious news that China’s economy appears to be slowing, which could—and we emphasize the “could” because we don’t know yet how things will turn out—cause the rest of the world’s economy to suffer. Meanwhile, a tweet from Hillary Clinton alleging price gouging by drug makers led to a large, sudden decline in biotech stocks. This happened even though she is merely running for president, and, even if elected, would likely have trouble working with a Republican Congress to change drug pricing. This overreaction is old Mr. Market at work again, selling on bad news without thinking anything through.

We have no control over Mr. Market. Instead, we can only control our approach to his constant fluctuation. Following Ben Graham’s advice, we recommend the following:

  1. Stay well diversified, so that you always have at least one source of money that isn’t currently declining.
  2. Emphasize value stocks whose earnings and prospects are being priced too cheaply by Mr. Market.
  3. Don’t sell when Mr. Market is frantically selling and restrain your buying when he is maniacally enthusiastic.

This is how we continue to invest your portfolio. We know the news is difficult lately and third quarter results were disappointing. Neither trend tells us what the future brings. Please call or email with your concerns and we will do our best to help you gain perspective and stay focused.

As I’ve said many times, I feel very fortunate to have such wonderful clients.  Thank you so much for your referrals!  This quarter was our best quarter ever, in terms of new growth! We have opened our doors to work with a wide range of clients, so please continue to spread the word.

Enjoy your fall!

Chris signature

About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.