My purpose in writing these missives is to give back. Even though people hire me to run the ball on the field, so to speak, it is also important to me that my clients, specifically, and individual investors, generally, have a better understanding of how the game is played at the highest level. I believe that in every endeavor it is best to have (good) teammates. But, teams are very different from a committee. Committees by and large are useless. Nothing great has ever come out of a committee. Teams on the other hand can (and do) challenge each other to push beyond what you’d normally do alone. Teams can be as little as two people. In investing, Warren Buffett wouldn’t be the icon that he is without his teammate Charlie Munger. 

This is what I wrote three weeks ago.

So what do we do now? Portfolios should already be proactively prepared (you see what I did there?) for peak inflation and for corporate profits to slow. We are watching for indicators like the one above, to signal that the market is beginning to re-price risk. This re-pricing tends to happen slowly then all at once. So you kinda have to be there first because if you’re not early, you’re late. We are also watching assets like U.S. dollar, conservative bonds, gold, and low volatility stocks (utilities, consumer staples, REITs) to show outperformance. These will be our green-light, confirmations that we are on the right path. The CPI number will be released tomorrow and it will most likely support the inflationary drumbeat of Wall Street. It will be interesting, however, to see what interest rates actually do after that report. Will they signal the top?

Well, fast forward to today and we have been getting green lights both right and left. This is not me trying to peacock around. This is me trying to get people to focus on something that is measurable and repeatable. Otherwise, what are we really doing here? If you’re just looking for random rewards you’ll be better off just going to Vegas and they’ll give you free drinks too! 

The title of this missive is a tongue-and-cheek reference to a particular episode of the 1970’s sitcom Happy Days. To “jump the shark” is an expression taken from an exciting scenario where “the Fonz” hopped on some water skis and jumped a shark contained in a large pen in an attempt to show his affection for his girlfriend. Of course he made it because it was TV. But in investing, we don’t risk-manage portfolios on TV. Our portfolios are real and in real-time. The big picture takeaway is that we are in the investment season of winter. This investment climate has very particular characteristics for portfolio construction and performance. 

“But Paul, it’s too late to sell,” is a common response I get about this time. The short answer is that it is never too late to sell because in “real life” we never know how far down an investment can go. We are trend followers, not fortune tellers. The caveat to my “it’s never too late to sell” statement is that before you take action, you must have a pre-thought out plan for under what conditions would you re-invest your proceeds. In my mind if one is saying they cannot sell because they wouldn’t know when to get back in, they are setting themselves up for a lot of financial pain. A large part and possibly the very first part of an investment strategy should be defining one’s edge. An edge is simply a higher probability of one thing happening over another. And, over the course of many opportunities, one’s edge should generate acceptable results. 

From my perspective one needs to clearly identify all of the parts to an investment strategy. This would include; what to buy (or avoid), when to buy, when to sell (90% of your success in those three words), and what to do with the proceeds. Each investment climate dictates at least a review, but most likely a reconfiguring of your portfolio assets. You wouldn’t go to the beach in August wearing a down jacket with wool pants would you? Today, this is the equivalent to owning bubble-cap tech and story stocks with no cash-flows in your portfolio right now. If you do, you are totally out of touch with the season. “Loving the company” and “they’re not going to go out of business” are not reasons to hold onto such stocks. The only good stocks are the ones that go up in price, the rest are bad!

We are headed into a very interesting time right now. In two weeks (March 16th) the Fed (Fonzi) is going to embark on, in my opinion, a huge policy mistake. (You see how I tied this whole thing back to the title) The Fed is Fonzi and Fonzi doesn’t make it in real life. The cool thing about the capital markets is that if one is aware, you can proactively do something about it. My concern is that the current positioning of the market is expecting a massive rebound in stocks once there is a resolution to the Russian/Ukraine conflict. Even if there is some kind of resolution shortly, we still have to deal with the fundamentals of a slowing economy, slowing corporate profits, and declining inflation. The driver of long-term movements in security prices is the business cycle, not random macroeconomic or geo-political events.

Have a blessed day!

P. Franklin, Jr., CEO

Franklin Trend Investment Management, LLC