The arrival of 2018 coincided with a return of volatility to the markets. In fact, there have been almost three times as many days when the S&P 500 moved by at least 1% so far this year (23) than there were in all of 2017 (8). Even glamour stocks such as Facebook and Tesla were not immune, experiencing drawdowns of 20% or more during the quarter.
Speaking of Big Tech, Rob Arnott with Research Affiliates has pointed out that seven of the eight largest companies on the planet now hail from one sector (Apple, Amazon, Alphabet, Facebook, Microsoft, Tencent and Alibaba). The love affair that the market has with these names harkens back to the time of the “Nifty Fifty” in the late 1960s. In those days, it was widely thought that there were a few dozen “one decision” stocks that should be bought and held forever, regardless of price, due to the underlying strength of those businesses. While many of the original fifty have stood the test of time (Coca Cola, Johnson & Johnson, 3M, IBM), a few have not fared so well (Polaroid, Eastman Kodak). The danger came though in conflating the notion of a great business with a great stock to be purchased at any price. Accordingly, those who had invested in the Nifty Fifty at the peak in 1972 would have lost two-thirds of their wealth by 1975.
I recently visited Yacktman Asset Management in Austin, Texas as part of our mutual fund due diligence efforts. The managers of the Yacktman fund are also looking to buy great businesses, but not at any price. On the contrary – they live by the motto “Its All About the Price.” They are more willing to hold cash than an expensive stock to avoid a repeat of the Not-So-Nifty collapse.
Whether or not the aforementioned volatility is the rumblings of an actual bear market is anyone’s guess. As Warren Buffett stated in his recent Berkshire letter, “No one can tell you when these things will happen. The light can at any time go from green to red without pausing at yellow.” In our opinion, the price-conscious approach of Yacktman (and others like them in our portfolios) is the prudent way to navigate this uncertainty.
Aaron Pettersen, CFA, CFP®