Hello from Sycamore,
Since early March, we’ve fielded several calls asking how we assess equity risk for client portfolios. At the time of your initial investment, we discussed how the Market is constantly moving up and down; during generally good markets, this is an easy concept to accept. However, during periods of correction, we observe increased volatility, and even the steadiest investor begins to worry. Let’s take a moment to review the process of building a healthy portfolio. The following observations are greatly simplified but should provide you with a basic understanding of what we look for in a company prior to purchasing it for your portfolio.
Setting Better Benchmarks
From our perspective, risk can be boiled down to a relatively straightforward concept. For the price that the market is asking me to pay for an investment, am I getting a reasonable value in return? At Sycamore, we employ many important data points to help answer that question: a few of which are annual profits, dividends, and financial strength.
As an easy example, let’s say you’re considering buying a solo-run business to own and operate. You review the books and learn the company has no debt and turns a profit of $50,000 per year. What would you be willing to pay to have access to that profit stream going forward? $50,000? Likely. $5,000,000? Maybe. $50,000,000? Highly unlikely. Because in the latter case, you would not obtain anything near an equal value in exchange for the price you are paying. Paying $50,000,000 to receive an annual return of $50,000 is not the best trade-off. We view stocks the same way. They are, after all, just slices of ownership in existing businesses.
Our job is to safeguard your principal investment and maximize your return.
When we say a company seems like a risky investment, that does not mean the stock itself won’t perform well. It very well may, for reasons that have nothing to do with our data points. Trendy products often capture the imagination of investors who feel generally optimistic about ‘getting in on the ground floor.’ What we are saying is that we don’t think you are being offered a reasonable value in exchange for your capital.
At Sycamore, we research the financials of a company with a careful eye on profitability, steady dividends, and financial stability. We seek out nimble companies with strong financials that can weather the inevitable market fluctuations.
Thank you for your continued trust and support,
Craig Smith with Anita Jay
*Data not audited
**Results reported gross of fees
***Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Investment return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than its original cost.