A few clients have asked me about the recent stock market volatility in the broader market in general and with a few select stocks in particular which contain a high amount of short interest (such as AMC Entertainment and GameStop). As such, I thought I would share my reply with everyone as you may be interested in my thoughts and our strategy going forward.
I must say first that I honestly find it entertaining to see hedge funds suffer since they often short smaller, distressed companies in which we sometimes own the debt (i.e. AMC Entertainment) and occasionally the equity (i.e. B&G Foods). Over time, hedge funds generally move out (i.e. “cover”) of their short positions and the companies usually remain solvent continuing to pay the interest on the bonds we purchase. However, at times the actions of hedge funds can speed up or help to bring about a bankruptcy by causing a loss in confidence as investment banks become unwilling to lend a lifeline to such distressed companies by extending them additional credit when the company is struggling.
The recent blog piece we put out is a good illustration of our patient, dividend approach and what happens when shorts eventually cover their positions as recognized from the returns of B&G Foods last year and during this January. If you missed that email, you may read it here: http://info.altrius-capital.com/blog/generating-income-through-the-covid-19-recession.
This of course is nothing new for us as this has been an issue for well over a decade and more so due to the proliferation of long/short hedge funds which employ such strategies. Should any company we own become dislocated completely from the fundamentals, we would of course sell it as we would with any company in which the growth potential is limited (usually that is when growth/momentum investors are purchasing it). If it was just trading noise and/or volatility impacting the company in the short term, and thereby not impacting the long term earnings of the company, we would keep to our discipline of trimming the position when moving higher or purchasing more shares when the price was lower. I always think of the companies we own as a business in which we want to hold for the long term. For example, I don’t care what Altrius is worth today as I don’t plan on selling it for two to three decades if ever. However, unlike growth/momentum companies which don’t pay a dividend, I pay myself a salary (our dividends) while continuing to invest in the business to ultimately improve the company (and its price) for the decades to come.
The pricing volatility has not, and likely will not, impact the majority of the companies we own since they are much larger, more stable, dividend stocks (such as Coke, Pepsi, McDonald’s, etc.). As such, this type of volatility doesn’t impact you or me who own such companies for the long term. However, as to client questions as to how long or what impact it will have on the market my answer is that I don’t know and don’t much care about such short term noise instead managing as we always have over the past twenty three years by sticking with our discipline as mentioned above (see B&G Foods blog above). It is this process which has enabled our clients to weather three significant recessions since founding my firm in 1997, two 50+% stock market declines and one 30% stock market decline last year. Importantly, none of our clients over the past twenty-three years ever had to go back to work. They retired comfortably by simply collecting the dividends and interest from the stocks and bonds we own – even when the stock prices are 20%, 30%, or 40% lower.
It is also important to remember that with Altrius’ investment strategy, we never have to sell a share of your stocks to provide you with retirement income needed to fund your retirement assuming you only withdraw the dividends provided by the companies we own. For those of you like me who don’t currently need retirement income from the companies you and I own, we are able to use the dividends of the companies to purchase more shares of the stocks at lower prices.
If you have any further questions about recent stock volatility, please don’t hesitate to call us.
With warmest regards,
Jim
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