Spring 2026
— Adrian G. Davies, CFA, President
Great stocks don’t perform every year and an underperforming year isn’t a good reason to sell one. When a stock goes down, investors often assume something must be wrong with the company operationally, but that isn’t necessarily so. Investors can get obsessed with short-term issues that are readily resolved within a year. Stock prices should be related to the long-term value of the company, but investors can get distracted, swaying market values.
Last year’s stock market dip was caused by President Donald Trump’s imposition of tariffs. The most recent market dip has been caused by the war with Iran. While these events have implications for earnings in the near term, the challenges tend to sort themselves out in the fullness of time. Stock prices tend to be at their lows when company outlooks appear most dour. Periods of investor fear have proved to be buying opportunities. Investors should hold stocks as long as their investment thesis and return potential remain intact.
Sometimes valuation adjustments are in order—the market can and does overshoot fundamental value both on the upside and the downside. Precisely because market trends can continue to diverge from fundamental value, timing short-term moves is fraught with risk. We are not aware of anyone ever being able to time these moves consistently, and even if there were such a person, capital gains taxes make short-term trading expensive.
Hold Strength
Instead, we aspire to generate strong after-tax returns by maintaining investments over long time horizons. We can be confident in holding stocks through challenging market conditions, knowing the underlying companies are high quality, which we characterize as having sustainable competitive advantages resulting in dominant or increasing market share. Strong competitive positions are typically reflected in companies’ financial metrics such as profit margins, return-on-invested capital, return of capital to shareholders, balance sheet strength, and growth. Holding great companies through their stocks’ peaks and valleys often makes the most sense.
When buying, it is wise to have a comfortable margin of error—additional return potential—in case there is a gap between what one understands about a stock and the reality on the ground. Having done due diligence on a stock, however, it is generally a mistake to get shaken off one’s investment thesis by market jitters. Investors can get shaken worrying that “someone else knows something.” Unexpected stock moves are a reason to do further research, but by taking signals from price moves alone, one is just as likely to sell a stock at a low price (or buy it high).
Most publicly traded companies are at least twenty years old and many companies are over a hundred years old, honing their strategies, operations and safeguards along the way. These companies’ longevity is generally a testament to their ability to adapt to ever-changing business conditions. Even when a company faces new competitive threats, capable managements find ways to optimize shareholder value, sometimes by acquiring other companies, and sometimes by offering themselves as acquisitions.
Over the long term, stocks generally go up. Wealth is built by holding companies for the long term, allowing gains to compound over multiple years, without trying to predict short-term moves and without incurring unnecessary capital gains taxes along the way.