Panic Is Not An Investment Strategy

The title of this piece came from a quote I heard while listening to NPR last week. I cannot think of a more apt name given the state of affairs in the markets recently. The carnage has been terrible and equity investors have seen portfolio values decline markedly over the past few weeks. It is really scary!

But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.

Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.

We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.

There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.

(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)