Famfunds Blog

By Tom Putnam

Green Shoots

“Green shoots,” signs of rebirth and growth in the spring season, was used as an informal term in the early 1990s to indicate signs of economic recovery in the United Kingdom. An American economist articulated the phrase in February 2009 and then the Federal Reserve Chairman, Ben Bernanke, popularized the expression on March 15, 2009 – a few days after the S&P 500’s recession low – when he observed nascent signs of economic improvement. Although there may have been times over the past three years when it appeared that those shoots did not take root, the economic data are convincing that the recovery, though slow, is real.

Focusing on the headlines can be disheartening. Certainly, we have some challenges: federal government deficit spending, European fiscal and sovereign debt concerns, and the lagging recovery in the housing and job markets. Nevertheless, we continue to see gradual improvement in various economic figures. Corporate profitability is at an all-time high, our unemployment rate is declining, the manufacturing base is becoming more competitive globally, bank balance sheets have been substantially repaired and credit is becoming more available and affordable, and personal balance sheets are improving with more confident consumers spurring sales of autos and other goods.

While we remain ever mindful of the macroeconomic data, it is at the company level where we spend most of our effort. Last year, many of the businesses we are invested in reported strong earnings growth and prospects for more to come. Several FAM Funds holdings are taking advantage of international growth trends while increasing their U.S. market share as heavily indebted competitors grapple to endure. Strong corporations are increasing profitability despite the current environment.

Price Is Separate and Distinct From Value

Corporate earnings ultimately drive stock prices. In fact, many S&P 500 companies had record 2011 earnings. You might ask, “With some of the best earnings in history, why didn’t the S&P 500 Index do better last year?” It was an extremely volatile year for the S&P and most of the fluctuations had little to do with the underlying economic value of the businesses that comprise the index. More often than not, it was the unsettling macroeconomic headlines that caused the indiscriminate selling of stocks regardless of how well businesses were performing.

How you handle short-term volatility is a function of your temperament and perspective. If you are patient and know the value of what you are invested in (or want to invest in), then downside volatility presents opportunity. We used the severe decline in stock prices last August and September to invest in high-quality companies whose stocks were selling at what we considered to be discounted prices. Some were existing holdings and others new ideas. We believe we improved the overall quality of stocks in the Funds and are well-positioned for the long term.

Our approach is to analyze the intrinsic value of the business which becomes our benchmark for determining whether the stock price is low or high. One of the most important tenets of value investing is that price is separate and distinct from value. A focus on the economic value of individual companies and our long-term orientation keep us even-keeled in turbulent markets.

FAM Funds

FAM’s long-term investment philosophy helps us focus on three- to 10-year horizons — and beyond. Just as the economy has shown improvement, the stock market has followed suit since it hit bottom on March 9, 2009. Over the last three years, we have been working as hard as ever actively managing the portfolios. While our process and philosophy remain steadfast, we have been exploring new investment ideas in various industries. Some of these newer stocks have made a positive contribution to the Funds.

We also had some exciting news:

1. 2012 marked the FAM Value Fund’s 25th Anniversary! Please contact us if you would like a free copy of our anniversary brochure, “25 Stock Investment Guidelines.” It is a collection of wisdom from investing through multiple Bull and Bear markets.

2. The FAM Equity-Income Fund celebrated 15 years in 2011. The Wall Street Transcript, SmartMoney, and Louis Rukeyser’s Wall Street highlighted the Fund.

3. On March 1, 2012 we launched the FAM Small Cap Fund. Our new Fund focuses on small companies with long-term potential.

We have a comprehensive offering of mutual funds to help you achieve your long-term financial goals. Though each fund differs in strategy, they share the same investment philosophy and approach that have been FAM’s hallmark. With the overall stock market trading at 20-year low valuations, we think portfolios of high-quality stocks can produce good results.

Although the mood of some investors may be tepid, rest assured that things are improving across multiple economic areas and have been for the last three years. Yes, we have had impediments, but this is to be expected as we work through American and global economic issues. Stocks have rallied and continue to show promise, especially those of first-rate companies. Also, we believe that there is still potential for equities from current valuation levels and the next three years may result in even further improvements.

If you have any questions about our Funds or want the Value Fund’s 25th Anniversary brochure, please call one of our in-house FAM Shareholder Services representatives at 800-932-3271. Thank you for your enduring trust.

Please see Fenimore disclosure.

Tom Putnam Introduction – Annual Shareholder Informational Meetings

“Long-Term Investing: A Bright Idea” was the theme of FAM Funds’ 25th Annual Shareholder Informational Meetings held on Tuesday, October 11th. The morning meeting took place at the Albany Marriott and the afternoon gathering was at the Cobleskill-Richmondville High School. Both meetings followed the same format with David Pollitzer, President of Fenimore Asset Management (Fenimore is the investment advisor to FAM Funds), welcoming attendees and opening with a customary prayer. He also introduced the Funds’ Independent Trustees and then Fenimore Chairman Tom Putnam took the stage.

Tom began, “I’d like to say a few words about a special place that’s in my heart and that’s the Schoharie Valley.” Tom told how Hurricane Irene flooded the towns and villages in the valley, including the Village of Schoharie where he lives, and all along the Mohawk River into the Stockade area of Schenectady. “Many people were affected. In the Village of Schoharie alone, there are more than 300 residents displaced and living elsewhere.”

Tom went on to say that it will take awhile to recover, but at the same time there is much hope. Hope that thousands of volunteers helped instill as they assisted people in their homes and businesses. Knowing that many attendees had been a part of the flood relief effort Tom said, “I’d like to thank you for your help, prayers, and concerns. Despite the devastation, the people of Schoharie Valley are resilient. They will rise again and it will be an even better place to live.”

He then turned on an LED flashlight that attendees received. “This light symbolizes hope for the flood survivors as well as another topic that is near to my heart and that is long-term investing. Since 1974, we’ve been following a long-term investment approach that we call value investing as we seek to protect and grow your wealth over the long run. Just as we did when we opened our doors, we still believe that long-term investing is a bright idea.” Tom stated that there is an overwhelming amount of independent research showing that long-term investing – even through a stock market downturn – yields better results over the years than trying to time a decline, remove capital and return when “things are better.”

Tom then focused on 1973 and 1974 when he founded Fenimore indicating that it was a similar – yet different – time. The market declined 50% just as it did in 2008. After that time in the ‘70s, there “was a long period of high unemployment, scarce job opportunities, and slow growth.” Even though we have these same conditions today, the environments are dissimilar because we don’t have the same alternatives as we did back then. Tom said, “Inflation increased to double-digits and because of that, interest rates went sky high and bonds were yielding double-digits by 1980. We don’t have that alternative today.” Currently, interest rates are low and bond returns are rather meager.

“However, even if you invested during what seemed to be the worst time in 1974, how would you have performed in the stock market? The Dow Jones Industrial Average was 550 and today it’s 11,000. That’s about a 20-fold gain,” Tom stated. Many investors significantly underperform the overall market because they let their emotions get in the way of rational decision making. Investors chase the latest fads, or have fear and sell when it’s time to buy, with the typical result being that they miss the upswings and their gains are much less than what they would have been if they had just stayed the course. “Trying to time the market just does not work.”

Tom continued that some people have a misperception about long-term investing. They call it “buy-and-hold” investing with the assumption that the investor buys the stock and then never looks at it again. At Fenimore, we call it “buy-and-monitor” investing. We proactively and vigilantly analyze a stock after we purchase it to make sure it continues to meet our criteria and growth projections. “As long as it does, there is no reason to sell it unless we have a better prospect. And in today’s marketplace, we have been given opportunities to invest in some better prospects.”

He then referenced the great examples of companies that we have held in the Funds for several years that were on display. Quality businesses that continue to create economic value, continue to grow their cash flows, and continue to show profits.

Tom concluded, “In the short term, even in an economy that is experiencing slower growth, we still believe we are in an advantageous position. Our Research Team continually works diligently to gather and analyze vast amounts of information to ensure that we are invested in the strongest companies. We like businesses with strong cash flows, global exposure, quality leadership, and little if any debt. In the long term we are still bullish about stocks and FAM Funds, and believe that they are the best-positioned asset class to outpace inflation and generate wealth over the long haul.”

Please see Fenimore disclosure.

By Tom Putnam

It’s clear that a lot of things have changed this past year including life’s circumstances, the macroeconomic picture, and the stock market. Nonetheless, through it all, some things are essentially the same. I believe it’s one’s outlook, expectations, and convictions that determine one’s level of satisfaction.

I have lived most of my life amid the stunning scenery and wonderful people of Schoharie County. Known as the “Breadbasket of the American Revolution” because farmers provided wheat and hops for Washington’s troops, the Schoharie Valley, like many parts of our nation this year, suffered devastating effects from a natural disaster. Hurricane Irene hit this valley hard destroying homes and livelihoods. Looking at the wake of the deluge, it’s apparent that reconstruction will be a lengthy process. The fertile farmland in the valley is warm and durable – its people as well. Over time they will rebuild and reap harvests once again.

The macroeconomic headlines have been similarly unnerving, including the: federal government’s gamesmanship with the debt ceiling and deficit spending, downgrade of America’s credit rating, European fiscal and sovereign debt concerns, ongoing struggles in the housing market, doggedly high unemployment, and snail-like economic growth. Since the financial crisis, we have communicated our anticipation of a slow-growing U.S. economy for the foreseeable future. This viewpoint stands. And although the recovery has been erratic and not as fast as many had hoped, we continue to see gradual improvement in various economic data – especially on the company level.

Corporate earnings, which ultimately drive stock prices, continue to be healthy and the balance sheets of numerous businesses are strong. As several global economies continue to outpace growth in America, U.S. companies are taking advantage of these offshore opportunities and many of the holdings in FAM Funds are expanding their international sales. They are also increasing their domestic market share as heavily indebted competitors in their industries struggle to survive. Additionally, industries such as retail, automotive, and manufacturing are doing much better than they were just a few years ago.

The volatility of the stock market in recent months has disillusioned some investors as well and shaken their confidence. Obviously the American government has a debt level that cannot be sustained and although the downgrade of its credit rating has likely contributed to short-term stock market fluctuations, it has put a spotlight on the issue that could help resolve the situation. Various other factors have also contributed to market volatility and while it may be difficult to endure, our time-tested investment approach has shown us that times of insecurity often create long-term opportunities.

These volatile declines caused several of our holdings to fall to our calculated buy prices and we added shares to the Funds as appropriate. We were also able to invest in quality corporations that are new to the Funds, at bargain prices. We patiently wait for opportunities to invest in staunch companies that have attractive valuations, strong U.S. market share, and are well-positioned to take advantage of international growth. We believe this replenishment of the Funds will be a positive in the next three to five years, but even more so over a longer-term horizon of five to 10 years.

The dichotomy between corporate America doing well and the government and people struggling persists. It would be imprudent for investors to ignore big-picture issues such as excessive government debt and the high unemployment rate. However, a preponderance of evidence proves the futility in trying to time a decline, remove capital and return when “things are better.” The fact is we live in an uncertain world, one in which there are real and perceived threats. Given the constancy of uncertainty, we believe the best approach to preserving and growing your wealth over the long term is to invest in a portfolio of solid companies with great management teams that have global sales and strong cash flows.

Fenimore Asset Management, the investment advisor to FAM Funds, has successfully navigated numerous challenging times over the past four decades. Our investment philosophy remains steadfast and we invest in profitable, prudently-financed, and well-managed enterprises. Our relatively unique, regular company visits are at the heart of our risk-conscious research and investment process. It is this company-level, grass-roots research that gives us conviction about investing in a business – especially during downturns.

Realistically, we continue to expect a slow-growth U.S. economy and are cautiously optimistic. Natural disasters, the financial crisis, and stock market volatility can happen in a flash; it takes much longer to renew and move forward in an enduring fashion. We encourage you to share our long-term outlook. We are still bullish about stocks for this decade and believe that they are the best-positioned asset class to outpace inflation and generate wealth over the long haul.

If you have any questions, please call one of our in-house FAM Shareholder Services representatives at 800-932-3271. Thank you for your ongoing trust.

Please see Fenimore disclosure.