Take What the Defense Gives You
On a day-to-day basis, investment managers compete against their peers to win deals, raise funds, and attract top talent. While the marketplace has perhaps never been more competitive, one opponent we all share in common is the market itself.
Like any good defensive coordinator in football, the market tends to lull investors to sleep. It does this with bull markets and long periods of economic expansion. Then, when you're least expecting it, the market will dial up a blindside blitz in the form of surprising economic news, geopolitical events, or any other developments that collectively alter investors' views around the trajectory of corporate growth.
If hindsight has taught us anything, it's that it's the "unknown" that take investors by surprise. In 2001, for instance, was the most recognized the runup in stock prices that characterized the dot-com crash, but it was the accounting scandals at Enron, WorldCom, and Tyco that shook investor confidence during this era. Seven years later, it was the opacity of CDOs and investors' inability to recognize or measure the underlying risk in these instruments that eventually triggered the global financial crisis. The broader point is that downturns may seem obvious in hindsight, but they're generally inconspicuous until it's often too late.
The combination of the fiscal flexibility granted to our lawmakers in the 1970s in breaking away from the gold standard, coupled with globalization in the 1980s and 1990s and technological breakthroughs over the last two decades, has increased the length of economic expansions and seen the previous four bull markets extend well beyond historical averages.
In fact, on July 1st, the current U.S. economic expansion officially became the longest on record, entering its 121st consecutive month of gross domestic product (GDP) growth since the 2008 recession. This expansion broke the prior record set during the 1990s tech boom when the economy produced continual growth for a decade.
Lurking around the corner are signs that momentum is weakening. Morgan Stanley's Business Conditions Index fell by 32 points in June -- the most significant one-month decline on record amid weakening sentiment across a broad base of sectors. Not to be overlooked, is a lackluster jobs report in May that missed economist expectations, ongoing worries of a potential trade war between the U.S. and China, and new concerns of another military conflict in the Middle East, this time with Iran, each is contributing to escalating investor concerns.
So with all this instability and potential conflict looming, the question remains, how much longer can we expect the economy's current expansion to continue? Your guess is as good as ours. To be sure, we are hoping for the best and remain confident in the long-term growth of our economy. However, we are not in the business of timing the market, and we recognize that short-term unrest often creates opportunities for those positioned to capitalize.
That being said, predicting the market is similar to a QB guessing the coverage scheme of an opposing defense before ever breaking the huddle. Just as a quarterback will process factors such as the score, field position, down and distance, personnel, and the defensive scheme as they walk to the line of scrimmage, skilled investors also require "situational awareness" to reconcile the evolving business landscape and never to let the crowd or opponent -- in this case the near-term whims of the public markets -- affect decision making. Investors, like a quarterback, must always be aware of their opponent's tendencies but take nothing for granted.
So how do we at Weatherford Capital plan to charge ahead during this dynamic economic climate?
Like we always do. We remain cautiously optimistic, prepared for any scenarios that could confront our current portfolio or prospective investments. Steadfast in our approach, we will stay hyper-focused on partnering with like-minded people, and the fundamentals of the business itself; ready to act quickly when an opportunity arises. Our investment posture will emulate the "athletic" position of a running back poised and ready to swiftly react to whatever blitz comes our way.
As a family-owned private investment firm, we don't let inflexible and often arbitrary investment mandates govern where we can and cannot invest. Rather, we pursue opportunities that offer the most compelling alternatives that will generate the best risk-adjusted returns. We have the freedom to stay in pursuit of a thesis that has worked for us in the past or to pivot based on economic factors or other developments that alter the risk/return equation. Regardless of economic conditions, our firm will keep our head on a swivel, aggressively trying to move the ball downfield and score; while not taking unnecessary “deep shots”. Like any good quarterback, we will trust the process and take what the defense gives us, over and over again.
- Drew Weatherford