Investing in a Changing World Requires Constant Study
The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on December 23, 2016.
I came across an online Buzzfeed article called “29 Things Millennials Killed This Year.” After rolling my eyes for what promised to be yet another piece of negative coverage regarding my generation, I scrolled on. It was a series of screenshots from various news sources with headlines such as “Blame Millennials for the Vanishing Bar of Soap.” “How Millennials Ended the Running Boom.” “Millennials Are Killing the Golf Industry.” “The Death Throes of Democracy: Murdered by Millennials.” The headlines were hilarious — and to a large extent, the news they conveyed was legitimate. Millennials are changing products, the market, the way we consume, oftentimes in dramatic ways.
Change is constant
But then, as a financial adviser, I remembered: Products, markets and consumption are always changing. Much of the change above isn’t just about millennial whims. It’s technological innovation, which millennials embrace. And though the speed of change has ramped up, change has always been a constant. In 1958, the average lifespan of an S&P 500 company was 61 years. In 1980, it was 25 years. Today, it’s 18 years. At the current churn rate, 75 percent of the S&P will be replaced by 2027! Which is why the person behind your investment portfolio — be that you, your adviser or the manager of the mutual fund you’re in — better be sharp, informed, a tireless learner and a part-time economist, accountant, world affairs expert and more.
Know your adviser
You should know your financial adviser. What kind of person they are, how they think and what their overall record is. We believe the same goes for the executives of the companies you invest in. Our firm certainly does. In fact, we endeavor to know all we can about the C-suite and their companies — both before we purchase their stock for our clients and for the lifetime of our clients’ positions in that stock. We study their financials, looking for hidden or unrealized value; we monitor changes in management and their competitive position; we watch for new product developments or technological advancements. Meanwhile, we’re just as vigilant about the macroeconomic factors beyond a company’s control: currency fluctuations, inflation, fiscal policy, regulation, trade agreements, cyclical correlations and much, much more.
How do we do this? Through Wall Street research, industry sources, conferences, personal meetings with management, personal meetings with customers, competitors and suppliers, SEC filings, news publications and news media, and constant and comprehensive data analysis.
Choose investments wisely
The challenge in investing, just like in everyday life, is aligning unreasonable expectations with reality. Our due diligence process helps us identify sustainable business models, trading at attractive valuations and governed by high-quality, shareholder-focused management teams. At the same time, it helps us avoid the high-flying stocks whose valuations are based on wildly overly optimistic expectations for the future. Searching for strong business models and strong management teams has another benefit. It leads us to companies that can not only weather but thrive in today’s world of technology-driven change and disruptive innovation.
The Greek philosopher Heraclitus, known for his doctrine that change is central to the universe, once said, “You never step twice into the same river.” Every day is a new day in the world of investing. Be sure you or your investment professional is up to the task.
Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean.