10 Time-Tested Investment Principles for Volatile Markets
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At Janus Henderson, we believe working together is the way to work better. With your goals and our expertise, your vision and our mission, all in perfect harmony. Janus Henderson, investing in a brighter future, together. Hello and welcome to Barron's The Way Forward. I'm Greg Bartalus and my special guest today are Michael Schaefer Sr., President of Schaefer Wealth Management Group of Wells Fargo, and his son, Michael Schaefer Jr., Managing Partner.

Today, we're going to be discussing time-tested investment principles for volatile times. And for the record, before we jump into this, we are recording on Thursday, April 10th. Right now, the market is incredibly volatile. So whether you hear this in a couple of weeks or a month, we're going to be talking about

the topic is very relevant. Volatility is going to be here for some time. So welcome to the program, gentlemen. Thank you. Thank you. Great. So Michael Sr., first tell us a little bit about your firm, your clients, what you do, and then let's hop into the topic. Okay, so we, you know, we service...

high net worth families and really act as more of like a family CFO for them. So, you know, we do estate planning, investment, obviously, and I think that's what we're going to mostly focus on today. Yeah, yeah, great. Okay, now we have 10 points here, and we're going to embrace and channel some

the spirit of David Letterman. Instead of going from one to 10, we're going to reverse the list. We're going to start at number 10 and work our way up to what you deem to be the most important principle for investing in volatile times. Okay.

So, number 10, Michael Jr., do you- Michael J: Yeah. So, 10 is having a plan. So, it's when we first meet, we establish a written investment policy and financial plan. And it sounds kind of obvious, but over time and everything, we've found, especially long term, that it's incredibly important to be able to go back and revisit what was first established. And then, especially kind of like now in times of volatility, it allows you to make rational decisions

in times of irrationality like we're experiencing now. Right. And when they call and you have to walk them off the proverbial cliff, so you just go back and say, "Look, remember, we have a plan." Exactly. And hopefully that proves effective and they're, "Okay, okay, sticking to the script. Okay." Yeah, it helps a lot. Very good. Okay, so now number nine. Have goals. That's number nine.

So goals, basically, they kind of act as an energy source. They keep you motivated to reach and understand, you know, what's ultimately trying to be addressed and, and,

and solved and whatnot. And they help make you, they help you give, they help give you a direction and understand and remain focused on what you're ultimately trying to achieve. And then by continuing to follow them, it allows you to stay focused and remain and not get distracted by what's going on in either the market or in news or whatnot. And with goals, I mean, it's

Is this more holistic? I mean, life goals or just financial? Like what's the context for goals here? It could be both, you know, because everybody's going to be different. But in each goal will have, you know, different dependent independent variables depending on what it is. So it could be both. Okay, excellent.

Okay, number eight. Have a process. So I grew up playing football and naturally, you know, we've watched a lot of football and over the time and whatnot, we've become big fans of Nick Saban. And we've learned he's not only a great coach, but also a great teacher and with great philosophies. And one of his philosophies is emphasizing, focusing on the steps needed to achieve a goal and not just the outcome itself.

And it helps you stay focused and concentrate not on the present moment and how to execute a plan and whatnot.

And then when you have this process down, it helps with the outcome. And then, you know, we've studied this over the years and it's allowed us to implement this approach into what we do on, you know, day to day and everything. And it helps us, you know, break down complex financial plans people may have. And then we can turn that into manageable, you know, manageable steps and tasks and

and remain focused on and disciplined and helps ensure that we meet the financial goals that we were trying to address. Okay. Mike Senior, number seven. Never follow the day-to-day fluctuations of the stock market. Well, much easier said than done, isn't it? It is. And with what we're going through right now, it's hard for people to stay focused. And getting back to the plan and putting it together,

you know, we can bring it out and we can talk to people about this and it's important. But we look at things a little differently. I mean, in my career, we've had 40% drawdowns. You know, 08, 09 was terrible. And it was a long-term problem because we had two years. Most people probably won't remember this period that we're going through. It's kind of like Brexit. And Brexit, you know, the market got hammered and,

You know, people don't remember it. They remember Brexit, but they don't remember how much and how it felt. And that's the problem that a lot of people now, they get very emotional and they're feeling this pain and they're looking at their numbers. And when you're in the middle of it, it doesn't look like, you know, how are we going to come out of it? But, you know, the market is a discounting mechanism. So it discounts what happens.

And then it reacts. And then once it's discounted, then it's reacting at the future because it's looking ahead. So it's kind of like what Wayne Gretzky said, don't go where the puck is, go where it's going. And so right now it's important for investors to think that way.

So what's the real risk, though, for following it? Is it just a risk that people will actually act on it and deviate from that plan number 10 and or needlessly worry themselves? I mean, I think it's both. People will worry themselves. I mean, think about what's happening right now. I mean, all the data that people get on their phone, on TV, you know, there's just a lot of angst right now and people are getting very emotional about it. And

So it's hard for a lot of people to see the forest through the trees and stay in a long-term plan when, you know, we have these huge, like today we were down 1,000 on the Dow. And, you know, the past five days have been incredible as far as how much the volatility has been. And volatility makes people get emotional and change. So, yeah.

It's hard. It's hard for investors. And it's, you know, by having the plans, though, we put this down. We say, look, let's just go back and take a look at this. What are we trying to accomplish? What are we trying to do? And that seems to help people quite a bit. All righty. Next in line, number six. Focus on data and price. Mm-hmm. So...

I think this is interesting because the data right now is, you know, where you get it from is really, really difficult. And so there's a lot of things out there that, you know,

that, you know, it's hard to trust that data. So what we look at when we're looking at it is we look at companies and that's really what we specify in this company. So we'll look at the companies, we look at the 13 Fs, the filings, we look at 8Ks, 10Ks, S1s if they're a new offering domestically, F1s if they're a foreign entity, and look at their competitors in the same situation. And so the

The data that we get is we just want real data. We want raw data. We don't want opinions. And so by sticking with that, it's helped us just stay really focused on the long term and really focused on the business. Yeah. And I mean, just it'd be helpful for listeners to understand your investing style in terms of...

what your time horizon and the kind of businesses you like to own. We can probably touch on some of that in your next coming points, but how would you just really briefly describe yourself to someone trying to get a sense of you? - Yeah, so, I mean, we actually, I mean, the way that we look at investing for most of what we do is the stock market really doesn't exist.

So we look at the businesses and we focus on the businesses. And when you focus on the businesses, the rest of this is just noise. And so when you have a market downturn like we're having right now where every business is being affected, unless it is specifically affecting the businesses that we own, we don't really do anything. Now in a regular market with regular marketing conditions, if you have a company that gets hit and the stock price drops, well then we got to look and see why did that happen? And that's where it's really important to focus on where you get the data

and just staying focused on that instead of the emotions or the volatility of that stock price at that time. All righty. Number five. Don't try and analyze or worry about the general economy. So when I first got in the business, you know, I had a manager that said, you know, you need to focus on all the economics and non-farm payrolls and all this. And what I really come to find was it was generally a large waste of time. And

We get back to just focusing on the businesses and things of that nature and businesses, you know, just like the market, it'll discount if there's a problem. And if there's a problem, then you got to make a decision. Is it a one-time problem? Is it a fixable problem? Or is it a problem that's just because of the market's getting hit? And so you really save a lot of time and, and staying focused on those businesses really just takes a lot of the emotion out of it. And, you know, it's,

So right now the crowds are, you know, and the talking heads are saying do this, do that. If you just focus on the business, a lot of that noise just gets taken right out of what your decision making is. And it just helps you make really good decisions instead of making irrational decisions. All righty. Next, number four.

buy a business, not the stock. So very Buffett-esque, right? To some extent. It is. So, you know, when Buffett and Munger looked at a business, they looked at, you know, the whole business. And then before they had all the billions that they had, they looked at as, you know, they would own a piece of it. And would they buy that piece of the business for a price that they felt if they bought the whole business? And that's really a rational way of investing.

So when you look at a company and you look at, you know, what are the long-term aspects of that company? And it's really, you know, not how it's going to affect society or how it'll grow, but rather determining the competitive advantage

of any given company and above all the durability of that advantage. And so when you look at a company like that and you buy a business like that, the short term doesn't make a lot of difference. And so it helps you to just not get as emotional. And, you know, the longer you own the business, you're going to ride the ups and downs. You'll deal with the bumps.

But those bumps you'll get used to and you will notice that it really doesn't affect that business. Right, right. So you have the moat, you have durability. Presumably what comes with that is pricing power.

Right. So, I mean, when we look at, and that's one of the, like, the criteria. So, we look for businesses that have a, you know, some kind of moat, like you said, high barrier of entry. We want it to have a durable competitive advantage. We want the management to act like a partner. And generally, we want it to pay a dividend because dividends don't lie. It keeps everybody honest.

And for most people, when they're investing, they're looking at what are they going to live off of down the road. So we want to have businesses that will give them the income that they need and grow the income.

So we look for businesses that pay dividends and raise them every year. And so if the business is earning money, they can raise the dividend. And it just keeps – it's a lot easier to track and look after. Right. And for those characteristics you just described, durability, moat, et cetera, what sectors do you tend to see that in right now to the extent it's correlated or clustered around any –

Well, I mean, if you look at right now, I mean, the business, you know, high end retail is not going to have an issues. We've talked about so far with railroads, companies that make a product, a simple product, it might be welding, it might be bourbon, you know, companies that aren't don't have to reinvent themselves all the time. So these companies, they can just, you know, continually grow their market share, grow globally. And by being able to do that, they're going to be able to raise prices.

Okay, number three. This is pretty simple. It's a lot easier, we think, to manage individual businesses than it is to manage a basis of mutual funds. Not that we don't use mutual funds sometimes because we do with indexing and things of that nature, but it's a lot easier to figure out

you know, from an asset allocation and also from just a business risk, you know, what are the companies we want to own? And if we use mutual funds, how much of them do we want to own? And it's mostly indexing that we do. So when you look at that, it makes it a lot easier than to figure out, you know, I'm going to sell one growth fund for another growth fund, take the tax hit. We try to make this as tax efficient as possible. So it's a lot easier to do that longer term with individual businesses. All righty. Which brings us to number two.

So number two is rent versus own. So the way we look at this is, you know, the first eight years of a business are going to be the most successful of that business when it's a publicly traded company. And so some of them won't meet the criteria that we talked about with a durable competitive advantage or remote, but they're going to be a new growth business. And so how we look at that is we want to participate, but we got to have a system that helps us participate because the exit is going to be more important than the entrance.

And so we want to have a system in place where the company is put into that system. And it's really a trading system that enables us to help keep track of it. And if it starts to move against us, we're out. And so we'll take small losses. And the premise behind that is let your, you know, cut your losses quick, let your winners run. So protect the downside, let the upside take care of itself. All right.

And this brings us to time to cue the drum roll. Yeah, number one. Continually work on your investment temperament. And this is really important because we're all being inundated constantly with data or opinions that

And if you think about it, there's not enough really business news most of the time to have a show 24 hours or, you know, most of the day. And it's ubiquitous on all trading floors that CNBC or some of the others are on there. And so you just get a lot of opinions and that second guess is yourself. And so...

You know, what we look at is if we know the business and the market is throwing a price that we want, we will buy that business. We don't get emotional about it. We don't let, you know, outside distractions. Data and price gives us the courage, not crowds. And it's just understanding the business and spending time on that business.

and that sector and the competitors that it has. That's what we focus on. So we want to spend our time understanding the businesses we're in, understanding the people that are running them, and understanding the sectors of the criteria that we talked about earlier with a durable competitive advantage and things of that nature. It just enables us to knock out a lot of noise and knock out a lot of emotions and really look at compounding over time by really trying to find businesses that we can hold onto for long, long periods of time.

Great. Now, you clearly have mastered the temperament aspect of investing, but for people listening, many, many people have not. I mean, given the recent volatility, a lot of people are selling, panicking, what have you.

What advice would you have for people who really want to improve that temperament or to what extent is that something we're kind of born with and it's really hard to change? I mean, what's your take on all that? Well, I think if you're stubborn, that helps. But I think that, you know, again, like Michael was saying, if you have a plan and you have a process, we're huge believers in checklists.

And, you know, these are just really long dated principles. And if the principles are dated, then they're not good long term principles. So you just got to focus on that.

And I mean, if you think about it, you know, you don't get a price. If you own an apartment, you don't get a price on the apartment. If you own a farm, you don't get a price on the farm. And, you know, people just hold these businesses for long periods of time or you have everybody in your town, you know, your town, our town. There's businesses out there where people have owned those businesses for a long period of time. They never get a price. And so, you know, people develop amnesia when it comes to investing and they start to think about what's happening in the moment.

And so what I would argue or tell people is, look, if you own a really good business, you're going to have bumps in the road. You can look at the data coming out on that business. And if the business comes into that's having an issue, it's easy to make a decision. Then you can sell it, feel good about selling it. But when you make emotional decisions based on market swings,

you know, I just, most people really, really regret that. And then it creates such a bad taste for them as being an investor.

And it really changes the way that they think about investing. And some of them might not ever even come back, which is sad. Now, I've heard stories like that. Someone panicked, they made a bad decision, and they write off the asset class. They're like, oh, stock investing's not for me. And meanwhile, bull market goes on. Right. And, you know, I mean, there's nothing more powerful than an operating business. So, I mean, it's going to be one of the best things you could ever own. It's inflation adjusted. It will grow and compound over time. But there's periods where a company won't perform. It'll underperform the market.

or if money is going more toward technology and you're in construction equipment or cement or things of that nature, you're not going to get the dollar so that company will underperform. And some people just think you always have to do something. And a lot of times you have to do nothing.

Exactly. I think that was one of Jack Bogle's famous quotes. He said, "Don't just stand there or do nothing," or something, variation on that. Yeah, yeah, yeah. Exactly. Yeah. I mean, a lot of times, and it's hard because people, a lot of times people just want to do something. It's like they feel like they've got to do something because somebody on TV is saying this or, and you got to remember, I mean, one of the things that is interesting to me is how people invest based on a calendar.

And I know we're all ranked by performance and things of that nature. But you got to be careful of that because, you know, the market doesn't care if it's December 31st or January 1st. It doesn't make any difference. And the business doesn't care, more importantly. Right, exactly.

Well, that was a great conversation. There was some really valuable advice there. So thank you for joining us again. Thank you so much. Absolutely. My guests were Michael Schaefer Sr. and Michael Schaefer Jr. For more podcasts and the latest wealth management news, visit barons.com slash advisor.

You can listen to this podcast on iTunes, Spotify, and Amazon. And be sure to check out The Way Forward Next Generation, a new Barron's Advisor podcast that shines a spotlight on the emerging leaders who are shaping the future of financial advice. For The Way Forward, I'm Greg Bartalus.

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