Articles

Money you don’t need, money you can’t lose

The stock market recently endured one of the fastest-ever sell-offs, which was followed rapidly by one of the speediest rallies we’ve seen, likely prompting many investors to rethink their investment philosophy. Here at Sicart, we have always seen investment capital as both the money our clients don’t immediately need, and money they can’t ever lose. The recent experience of higher volatility and widespread uncertainty has only reinforced this opinion. In a conversation with a new client not long ago, I had a chance to share those two assumptions, and explain how they help us navigate the investment choices that best suit our clients while protecting their interests.

We strongly believe that the funds intended for investment should be first of all, money that’s not needed in this moment or in the near future. If a client has a large purchase in mind – a car, a house, a boat — that amount should be earmarked for that specific need, and put aside in the safest short-term investment possible – for example, cash or treasuries. That’s capital that should not be invested in stocks, for two reasons. First, as long-term disciplined investors, we can’t promise that we will find an investment that will work quickly enough so that the money can be “released” in time to fund a big purchase. Second, every investment carries risk, and if so, when the investment is sold, especially sold prematurely, a loss might have to be realized and the amount returned can be smaller than the amount needed for the expected expenditure.

Given the investment style we follow, it’s ideal if the money invested with us won’t be needed for the next 3-5 years. In fact, the time horizon of the nearest possible moment when the capital (or a meaningful portion of it) is needed should align with the investment horizon we propose for that money. It’s essential for both us and the client, if we know that a certain amount will be needed sooner rather than later. That’s something we are always happy to take into account in our investment process.

Just because the capital invested with us is not needed right away, it doesn’t mean all risks are acceptable. On the contrary, we know this capital is money our clients can’t afford to lose. There will be market fluctuations as prices of our holdings move up and down, but it is a permanent loss of capital that we are the most concerned about. To us, a permanent loss is an investment that turns out to be worth much less than we expected, and the hopes of recovering the majority of our initial investment are slim. Of course, we cannot guarantee investment performance or the avoidance of investment losses. To mitigate the risk of coming across such an investment lemon, we tend to hold 30-50 stocks. Then one particular unfortunate investment doesn’t do much damage. Also, as a rule, we do our best to avoid any individual investment that has an obvious potential of going to zero.

A company with no profits and no business model is a prime candidate for a permanent loss, no matter how high its market price might be at a given moment. WeWork — with a $50 billion peak valuation, failed IPO, and the most recent price tag of a mere few billion — is a good example. Just because something has a massive price tag doesn’t mean it’s worth anything. As value investors who like to get the most value for the lowest price, we strongly believe that the markets eventually close the gap between price and value, and in case of WeWork, we believe, the two will eventually meet at zero.

Other candidates for permanent loss would be companies that have borrowed too much money to prop up vulnerable businesses. JC Penney, Neiman Marcus, and J. Crew are among major retailers who filed for bankruptcy in the last few weeks. A bankruptcy means a total and permanent loss for stock investors: a zero.

Investing becomes a lot simpler when one eliminates obvious dangers. It doesn’t make it risk-free, but it tilts the odds in our favor.

Turbulent markets are a good time for clients and money managers to make sure they are on the same page when it comes to investment philosophy. Our goal at Sicart is keeping and growing our clients’ family fortunes over the long run. We navigate our investment decisions with the two assumptions in mind – it’s money our clients don’t need, and it’s money they can’t afford to lose.

Bogumil Baranowski

Published:  5/21/2020

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.