Independent Thinking^®

Tuning Out the Noise

Invest with a long-term horizon. That’s easier said than done in markets saturated with news coverage, but it’s important to resist the influence of short-term gyrations in the markets.

Investing shouldn’t be a spectator sport, and nonstop commentary on every economic and corporate data point is not necessarily adding value. Indeed, it probably does more harm than good, even when the predictions are right. Nothing emboldens a wizard like a correct guess.
 
As we work with clients, we endeavor to understand their long-term goals and objectives. We combine this understanding with our long-term view of asset classes and securities to build the portfolios that we think will best achieve those goals. We do this precisely so that we can resist the influence of the short-term emotion of gyrating markets and volatile securities. This is not to say that we ignore the short term. New information is incorporated into our long-term view of the attractiveness of each investment but with the knowledge that any single data point may not be that meaningful.
 
What is true for our broader view on asset classes is also very true for our view on individual equity securities. We are long-term, fundamental investors and purchase equities with the intent of holding them for many years. Our average turnover in client accounts is less than 20%. In our collective experience, this is one of the few ways to improve the chances of outperforming the broader market.
 
By fundamental, we mean that for each equity security we decide to buy for client accounts, we attempt to develop an understanding of how the business works: how revenues are generated, how those revenues flow through the income statement, and how they will hopefully generate significant profit. How that profit is then used is critical as well. Is it returned to shareholders? If so, how? Is it used to reinvest in the business or make acquisitions? Ultimately, the goal is to determine what we think a business is worth now and what it could be worth in the future.
 
While equity markets are generally rational over long periods of time, they are also wildly irrational in the short and medium terms. Swings in sentiment can be driven by any number of events, some directly related to equities, some only tangentially. And changes in investor sentiment can, in turn, fuel further change, temporarily overwhelming valuation.
 
A case in point is the recent move in the price of the commercial real estate service company CBRE (CBG). In December it was over $37.00 per share and, we thought, fairly valued. Over the next six weeks, it dropped as low as $23.00 per share, a 40% decline on no significant news. While the decline was painful, it also represented a great opportunity to add to a core holding at much lower prices, as our view of the value of the business was unchanged.
 
As John Apruzzese discusses in the cover article of this issue of Independent Thinking, eventually cooler heads will prevail.
 
Tim Evnin is a Partner and Portfolio Manager at Evercore Wealth Management. He is also a manager of the Evercore Equity Fund (EWMCX). He can be contacted at [email protected]. For further information on the fund, please visit www.evercoreequityfund.com.