Price and Quality No Longer Matter
by A. Scott White, CFP®, ChFC, CLU
President, Scott White Advisors
As we began the new year, we witnessed the Dow Jones Industrial Average1 soaring past 26,000 as of January 17, 2018.2 And while many economists speculate 2018 will be a repeat of 2017, there are many who predict just the opposite—that the stock market will crash. I make no such prediction either way, just as I did in the Fall 2017 Navigator when the Dow raced past 22,000. As I expressed in my article “The Importance in Investing in Quality,” I am suggesting that this is a very dangerous time for the investor.
The reason I make such a statement is because I realize that at moments in time like this, human emotions often replace sound logical wisdom. In other words, individuals who have already made up their minds that the stock markets are poised to repeat 2017 this year will go “all in” and abandon a properly diversified portfolio, going for more growth, and those who are fearful that this stock market bubble will burst this year will also abandon their properly diversified portfolio and seek to reduce volatility. In my mind, both camps of investors are wrong. They are wrong because abandoning a properly diversified portfolio favoring either reasoning means the individual is no longer an “investor,” but instead has become a “speculator.” And speculation is not an investment strategy built around an individual family’s needs, circumstances and goals.
Perhaps the only thing I believe the stock market’s performance in 2017 shed light on is that price and quality no longer mattered to most. Consider this recent statement by Vanguard Chief Executive Officer F. William McNabb III, “You’re still seeing the highest level of flows into riskier assets than at any time in my career.” He adds, “I don’t think there’s much that changes these flows until we have a negative market. I can’t tell you when that happens, but when it does there will be a lot of very surprised investors.”3 I believe those statements reflect a clear sign that quality didn’t matter in 2017.
Then there is the more recent statement by James Mackintosh, a senior columnist with The Wall Street Journal who spent almost 20 years at the Financial Times. He wrote, “Forget fundamentals: Momentum is back in the stock market. For the first time since the 2008 financial crisis, the simple strategy of buying the stocks that had already gone up the most delivered a remarkable outperformance last year.”4 Oh my, what kind of warped stock market phenomenon resulted in that brilliant observation? Can anyone believe it is a good idea to just keep buying stock in the companies whose prices have gone up the most?
But as we start 2018, this is where we are: Price and Quality no longer matter. At Scott White Advisors, we believe price and quality are the only things that should matter to the investor. When we build portfolios designed to meet your family’s unique needs, four solid investment evaluation practices are followed before a company’s stock is added to your portfolio. First, only buy stock in the world’s most profitable businesses. Second, make sure those companies’ management teams are working on behalf of their shareholders and simply not trying to line their own pockets. Third, make sure those companies do not have too much debt and have solid balance sheets. And fourth, once those companies are identified, don’t pay too much for their stock when you buy it. If you pay too much for a company’s stock, you can follow the first three investment practices correctly, but still have a lousy investment. Consider the investor who purchased stock in Microsoft in December of 1999. It has certainly been one of the world’s most profitable companies since that date, with a great management team working on behalf of its shareholders, and it was never burdened with too much debt. Yet it turned out to be a disappointing investment because the investor had to wait until the fall of 2016 for its stock price to reach the same level it had achieved in 1999.5
At Scott White Advisors, we will never give up on price and quality by chasing past performance when it comes to achieving your family’s goals. Often the value of our advice is based on the mistakes one doesn’t make. And while you might think you’d never pay too much for a crappy automobile, that analogy applies to many investors today. The next financial calamity is still unknown. No one knows what will cause it and when it will happen, but happen it will. And when it happens, price and quality will reign again, as they always do, when achieving long term goals.