Letter from Cobleskill-Fall 2015

By Tom Putnam 

Our 22nd Annual FAM 5K “Fund” Run/Walk for charity was held on September 26. It is always a special day and we express a heartfelt thanks to all the participants, volunteers, supporters, and charities involved. I had the pleasure of speaking with several shareholders at the event and the stock market’s recent volatility is certainly on people’s minds. Upon reflection, the different ways investors react to volatility make me think of Phil — a longtime FAM 5K volunteer.

Phil arrives each year in his pickup truck, with a long flatbed trailer attached, and moves materials around the venue. I marvel as he simply looks in his side view mirror, calmly backs up the trailer, and places unwieldy items into even the tightest of spaces. For drivers with limited experience at this, maneuvering a trailer in reverse is a counterintuitive process. Our approach to long-term investing can be much the same.

In the Chairman’s Semi-Annual Letter we stated that the focus on when the Federal Reserve would raise interest rates (as of 9/30/15 they had not), vacillating oil prices, and the slowing economic growth in Asia and Europe stirred emotions and moved markets the first half of 2015. We expressed that these, and future issues, would be factors in the coming months and we would not be surprised if stock prices became more volatile as a result.

One of those unforeseen issues was that China’s economic slowdown was more severe than anticipated. Another was that Corporate America’s earnings were essentially flat in the second quarter of 2015 and this was the first stagnate quarter in three years. Additionally, earnings are expected to be down in the third quarter. The Energy Sector’s dramatic decline is also having a considerable impact on corporate profits and revenue growth. For example, industrial businesses that sell to oil and gas companies have been negatively impacted. All these factors helped create a roller coaster ride in August as the S&P 500 Index notched its worst monthly performance since May 2012.

This caused many investors to panic and run for the hills. They sold their stocks or mutual funds and locked in losses. Many probably lost some of their gains from the past six years of our rising bull market. We continually underscore that if you have a long-term investment horizon and do not need the money, it’s good to stay invested during market fluctuations. People can let emotions get in the way of making rational decisions and try to time the market — the evidence is clear that this just does not work over time.

A Correction, Not A Crash
I understand that some of you may feel as if the fiscal crisis was just yesterday, but we believe that it was truly a once-in-a-lifetime event. While these matters creating market turbulence are undeniable, they are not systemic like we saw in 2007 and 2008. What we just experienced in August was a “correction,” an event that many felt was overdue. A correction is defined as a 10% drop from a recent peak. The stock market did not “crash.” It’s important to keep this in perspective because the S&P 500 Index has climbed more than 200% since the market bottomed in March 2009.

For bargain hunters like us, volatility creates opportunities. It’s our experience that the share price paid for a stock makes a big difference for long-term returns. That is why we embrace market downturns and invest in quality businesses at a discount to our estimation of their economic worth. As part of our active portfolio management this year, we have trimmed and sold stock positions in various companies (primarily because we calculated that they were overvalued). This provided us with the cash to invest in existing and new holdings that have longer runways for growth. We made multiple purchases in August 2015, just as we did in May 2012 and August 2011 when the market dropped. Similar to those times, we think these latest buys have put our three funds in good positions for the long haul.

Unique Shareholders, Counterintuitive Investing
I would like to highlight you — our shareholders. When the market was fluctuating and some in the financial media were making noise, our phones were pretty quiet. When certain pundits were encouraging investors to sell low, many of you made purchases for your accounts. We applaud you for your long-term investment outlook and staying the course! At the same time, I want to emphasize that our in-house FAM Shareholder Services Team always welcomes phone calls and visits. We also know that some day, regardless of the market, you will need to make withdrawals so that you can put your assets to good use — that’s why you invest. The point is that you are intelligent investors who maintain a proper perspective even when market sentiment is irrational. In fact, short-term investors would probably characterize your rational behavior as counterintuitive.

Our Investment Research Team is rooted in this same contrarian approach. They continue to visit companies and work painstakingly on your behalf so that we have a vetted list of quality businesses to invest in when they are temporarily out-of-favor and the price is right. We appreciate your ongoing trust and encourage you to visit or call us at 800-932-3271. Thank you.