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How to Weather Volatility

How to Weather Volatility
August 21, 2023

A handful of Tribe members have written in lately to express concern about the recent volatility we’ve seen in the stock market.  Naturally, this has led many positions in our portfolios to pull back along with it.  But it’s important to keep our strategy in mind when we see volatility like this. 

As long as the market volatility isn’t related to our investment theses for our portfolio companies, we shouldn’t worry. And small-cap stocks in particular tend to swing a bit more than large-cap stocks in moments like this, but it’s important for us to maintain our composure and not allow paper losses to scare us out of our positions in solid companies. That simply turns our paper losses into realized losses.  This current batch of volatility is just par for the course.

 I have seen it a hundred times and will see it a hundred more.The best reaction is twofold.   One, don’t get thrusted out of great positions at the wrong time. And two, be ready to spot opportunity when it arrives. Rocky roads, like we’re seeing now, usually bring us one or more such opportunities.

Rather than panicking, we’re on the hunt for great companies that this dip has brought back to reasonable valuations. So I encourage all Tribe members to stay the course and not allow the big money that is shuffling stocks around to push us out of great investment opportunities.  And one more thing…

It is very normal to see higher volatility toward the end of each quarter. Why? Well, all of the hedge funds and institutional funds that are incentivized on quarterly performance tend to rebalance portfolios to their advantage. This creates what I call some artificial volatility, in other words. If it weren’t the end of the quarter, much of the trading wouldn’t have happened. 

To the extent that we can, we should always try to keep in perspective the difference between what is happening with the underlying stock that we own versus general market volatility.  If there is a problem with the stock itself – if something has fundamentally changed with our investment thesis – then it is time to sell. But if this hasn’t happened, and the broad industry and economy are healthy and/or getting stronger, then we hold on. 

Another way to weather volatility like this is to put the time frame in perspective. After all, most investments are made with the intention of capturing long-term capital gains. Long-term capital gains allow us to enjoy a much lower tax rate on those gains, and all it requires us to do is hold for 12 months or longer.   Therefore, we’re really not worried much about some short-term volatility in those first twelve months. We’re just working toward our long-term capital gains. 

One final point. When there is any fundamental change in my investment thesis in any company that I have recommended, I will let Tribe members know. And if I feel that the overall economy is in trouble and there is a systemic concern that will affect all sectors of the market, Tribe members can be sure that they will hear from me directly with guidance on how we should position ourselves.

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