Volatility continued during the month of September with many asset classes experiencing price declines. We took advantage of a market rebound in US stocks towards the middle of the month to reduce our exposure and add to our cash positions. With a majority of asset classes now lower than they were a year ago, we plan to continue to be patient with our current holdings, and alert for opportunities to add investments at attractive prices using the cash we have accumulated.
The majority of asset classes experienced price declines during the month of September. Global stock markets were down roughly 3-5% and certain commodity related asset classes dropped even more. Asset class valuation and trend differences have become increasingly pronounced. By way of example, a broad measure of domestic stocks is up almost 50% above the peaks of 2007, while a broad measure of emerging market stocks remains about 30% below its peaks of the same year. Often a bellwether of commodities, gold has retreated over 40% from highs reached in 2011 and now trades at prices last seen in 2009. Measured from the same point in 2009, an investment in high yield bonds would have returned about 50% based on today’s prices. Price and valuation changes give us opportunities to potentially enhance our long term returns.
Market declines offer wonderful opportunities to deploy capital for future profitable harvests. Using a farming analogy, where possible we want to plant during periods of low prices and reap the gains during seasons of elevated prices. Most of us love to buy items on sale when possible, but we often feel differently about buying investments on sale. The reason is for this is that watching prices decline induces fear and that fear can cloud our rational judgement. This is where valuation models, and taking a disciplined approach to investing can have long term rewards.
As value sensitive investors, we welcome wide differences in asset valuations and relative performance because it can grant us opportunities to buy low and to sell high. While no one we are aware of has a properly functioning crystal ball when it comes to asset prices, we can and do try to buy a little more and sell a little less during “buying season” for any given asset class. Our view is that some of the asset classes we follow are definitely closer to “buying season” than “selling season” and our plan is to take advantage of some of these differentials over the next few months while remaining appropriately diversified.