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Clayton Zacharias & Mark Uptigrove | March 12, 2018

A contrarian’s view of market volatility

February began with the biggest sell-off in US stocks in nearly two years, and the pressure quickly spread to Europe and Asia. Though the dust has settled—for now—investors are well aware that volatility could return at any moment. But while stock market volatility can cause some investors’ blood pressure to spike, the Trimark Income Growth Fund investment team prefers to keep calm and consider the opportunities. After all, we consider ourselves business people buying businesses, not traders of pieces of paper.

What drives us: Discipline, patience and originality

Discipline. A core belief of our fund’s investment philosophy is that long-term investment success requires strict adherence to one’s investment discipline over time, regardless of current trends or consensus thinking. We focus on companies that we believe are industry leaders, have strong growth potential and stable financial structures. Great emphasis is placed on the quality of the company’s management team and its commitment to securing a competitive advantage for its products and services. We believe a disciplined and consistent investment process is paramount to our success through market cycles.

Patience. Central to our investment philosophy is our adherence to a long-term view, typically three to five years or longer, because we believe good business strategy usually takes time to implement and be fully realized. Because our investment strategy is focused on the long term, we have the ability to buy assets whose long-term value is currently underappreciated by the market, and then wait to reap the potential benefits for our portfolios and our shareholders. Further, we view market volatility as merely short-term “noise,” not as risk. Rather, we define risk as the permanent loss of capital. Therefore, we insist on building in a “margin of safety” into the price we pay for a business, so that short-term dips in the price don’t distract us from our long-term investment thesis.

Originality. We believe long-term investment success is achieved through developing original insights and ideas for investments. Therefore, we conduct thorough, independent research, which includes performing meticulous financial statement analysis and meeting with company management teams. We spend a considerable amount of time searching for what we believe are high-quality businesses that have effective management teams in place. If their stocks are not priced attractively relative to our conservative estimate of the businesses’ intrinsic value, we place the stock on our watchlist – and wait.

Our ‘dry powder’ provides us with flexibility

Having this contrarian perspective and patience helps us to view market volatility as an opportunity to deploy cash into long-term investments. Our current cash reserve is the result of our investment actions – selling holdings when they appreciated to our intrinsic value estimate – and what we believed were high equity valuations, particularly for higher-quality businesses. Having this “dry powder” also gives us the flexibility to deploy capital with a contrarian approach and invest in the businesses on our watchlist only when they meet our stringent requirements.

Further volatility ahead?

We believe macro issues such as interest rate risk, geopolitical uncertainties, governmental policies and the age of the current market cycle are likely to increase volatility relative to what we have seen over the last few years. In our view, this is likely to create downside risks for passive index investing and opportunities for active managers to outperform.  Further, we believe a more attractively valued portfolio built with higher-quality businesses can better withstand market volatility, given a more favorable balance between risk and reward.

If you would like to read more about our straightforward approach to finding high-quality businesses and managing risks in our portfolios, please see our 2017 Year-End Letter.

More from Clayton Zacharias & Mark Uptigrove

A contrarian’s view of market volatility
March 12, 2018

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