The Real Risk for the Long-term Investor
By Tim Hoyle
As the markets flirt with correction territory and many once-high-flying stocks have been cut in half twice, I’d like to share what we view as the greatest risk investors face and why Haverford Trust’s investment philosophy resonates with me, my colleagues, and the clients who partner with us to achieve their financial goals.
Quality Investing® is about controlling risks. We seek to invest in companies with proven and sustainable growth opportunities without losing sight of our fundamental responsibility to protect purchasing power. At Haverford, we employ investment strategies designed to manage risk throughout the market cycle.
There are several academic and practical definitions of risk, including beta, standard deviation, and tracking error. These risks are measured daily, easily calculated, and often discussed. But the paramount risk to investors is capital impairment[1], which happens infrequently (thankfully!) but can deal a devastating blow to investors’ goals. There are several common sources of this risk, including overvaluation, competition, faulty business models, and financial leverage. We are currently witnessing a destruction of capital on par with the bursting of the tech bubble in 2000 and the great financial crisis of 2008.
The market prices of many businesses with overly optimistic expectations have collapsed. Billions of dollars of market value has been lost and there is a chance much of it will be permanently impaired. Many “Covid-darling” and meme stocks generate scant earnings, and earnings growth is the only thing that can save investors from buying over-valued assets.
Many Covid-darling stocks have destroyed capital.
Source: FactSet; as of May 13, 2022
Haverford’s investment philosophy, which focuses on owning businesses with a proven track record of sustainable growth validated by growing dividend payments, is designed to guard against the riskiest investments. But that doesn’t mean it can protect against all volatility. We are witnessing a bear market in many industries, and several of the stocks we own are down significantly. However, we anticipate these stocks will ultimately be priced on their fundamental foundation of earnings and dividends. In the near-term, these earnings and dividends should provide a floor to a falling stock price, and in the long-term, if earnings continue to grow as anticipated, so too will the intrinsic value of the company and its stock.
This may be an understatement for many of you, but while it can be uncomfortable to stay invested and keep investing during difficult markets, we believe Haverford’s Quality Investing philosophy improves the odds of being a successful long-term investor. Your Haverford relationship management team and the entirety of our team is working behind the scenes in pursuit of your goals. We’re in this together, for the long haul.
