By Ryan Yuhnke
The financial markets have certainly been through the wringer the last few years. We’re all tired of fear-inducing headlines about rampant levels of inflation, stock market declines, increasing layoffs, and a looming recession. Yet not all hope is lost. As we continue through uncertain economic times, there are still things you can do to improve your financial life.
I’ve written before about the importance of staying calm, creating or maintaining an emergency fund, and reviewing your investments to ensure they meet the time horizon for your financial goals. Those are still key things to do, especially now.
Yet there are two more financial lessons that are essential for all investors to know, particularly in a market downturn like what we face right now. WARNING: This is a higher level of sophistication and more than simply spreading money out in funds that have done well in the past, HOPING they do well.
Those lessons are to know the QUALITY of the investments you own, and to know how they are PRICED. If you have high-quality investments at a fair price, it will help you get through market downturns more easily. And if you don’t have one or either of those attributes, it’s likely time to consider a change in your investment strategy.
1. Owning Quality Investments
Owning high-quality investments is a key focus of our investment strategy. Quality refers to the strength, durability, and financial viability of an investment. Simply put, do you own stock in a real business that earns consistent profits with real services and products that people will continue to buy? Or do you own stock in a so-called business that is more fluff, fiction, or has the hopes of turning a profit in the future? Think Peloton Interactive whose price was once above $150 and now is under $10.
After the last decade where we watched the stock market soar, it was all too common for flashy, profitless technology companies to accelerate in value without a viable business model. Or you can look at the cryptocurrency craze, which led some naive investors to think that investments only went up despite no underlying intrinsic value, but rather a fairytale.
As interest rates rise, and investors start to be more selective about where they invest their money, these types of investments are less and less attractive. Especially when you consider that lower-risk investments, like U.S. government bonds, are yielding higher returns than they have in years.
To make sure you have quality investments, going into this recession, you need to ask, are my investments profitable companies that have weathered the storm before and have optimistic prospects looking into the future? Having profitable companies will give you the ability and familiarity to hold onto those investments when the general markets may fall in price. Dealing with an experienced advisor who has insight into individual companies is the easiest method to follow, but this is especially important when owning ETFs or Mutual Funds because it is more difficult to understand the components inside those funds.
2. Knowing a Fair Price
Now that we know it’s essential to own quality companies or baskets of companies in ETFs, let’s discuss price. We all make judgments about price in our daily lives, and it should be no different when we invest. When you bought your home, you looked at the price per square foot, the current asking price, comparables in the neighborhood, and other metrics. The same can and should be done when evaluating your investments.
The most common metric in investing is the price-earnings (P/E) ratio. It measures the price that a share of stock is currently selling for compared to the earnings that share generates. Typically the higher the P/E ratio, the more a company is overvalued or expensive, and a lower ratio signifies that the stock is undervalued or priced more inexpensively. There are exceptions to this rule, and you shouldn’t buy based solely on this metric, but it’s a good starting point.
One great example is Costco. They’ve increased their earnings consistently over the past two decades and in 2009 during the Great Recession, profits only went down 13%. In other words, people kept shopping at Costco to get those great deals, even amid a recession. While that’s encouraging news, when you look at the P/E ratio, things look different. Historically, the P/E ratio for the company has been 26. Yet right now, shares are currently trading at a P/E of 35, almost a 35% increase on their 20yr historical valuation. So while Costco is a high-quality company, the shares are currently overvalued and it’s not worth the investment based on its current price. Taking it one step further being EXTREMELY CAUTIOUS the low P/E ratio for Costco in the 2009 recession was 16. What that means is with no decline in earnings and only the Price paid per dollar in profit P/E contracting… Costco stock can go down more than -50%+ or $14.50 in 2023 profits multiplied by 16 = $232 stock price. Compared with the price now in late April close to $500.
Other companies, like Coca-Cola and McDonald’s, also meet the requirements for being a high-quality company, yet, based on their current valuation being priced well above their historical averages, are overvalued in my opinion and don’t quite meet my requirements for an investment. The great thing about investing in the stock market, though, is that these prices change over time, so just because an investment is overvalued today doesn’t mean it will always be overvalued in the future. If you find a quality company that you want to own but it’s overvalued, keep your eye on it and wait for a more opportune time to invest.
Buying and Owning the Right Investments at the Right Price
While these sound like two fairly straightforward lessons to follow, the reality is that it’s not always easy to evaluate high-quality companies that are available at a fair price. If you’re looking to improve your investment strategy by following these lessons, I’d love to see if we can help. You can schedule an appointment with us by calling (800) 880-2760 or emailing Kitty at kchu@CourtInvestmentServices.com.
About Ryan
Ryan Yuhnke is founder and Principal at Court Investment Services, an independent, fee-based investment firm that serves attorneys and fiduciaries as they manage estate-held assets. With two decades of experience, Ryan’s proactive, relationship-based process saves his clients time and money while putting them first in everything. He provides services and support to help attorneys and professional partners oversee and manage special-needs trusts, estates, conservatorships, guardianships, and other court accounts, including IRAs, 401(k)s, and all manner of retirement accounts that also fall under his clients’ management. Ryan is known for his commitment to excellence and transparency and his deep knowledge of probate laws, court compliance, and strategies to keep assets safe while abiding by all court and probate code directives. Ryan’s goal is to make his clients’ lives easier, providing investment support and education along the way.
Ryan has a bachelor’s degree in economics from the University of California, Irvine, and built his career working in banks, national investment firms, and registered investment advisory firms (RIAs.) Prior to starting CIS, he earned the title of First Vice President, and Portfolio Management Director while employed at Morgan Stanley in Newport Beach, CA. When he’s not working, Ryan can be found traveling to experience new cultures and environments, focusing on personal development through mental, social, spiritual, emotional, and physical growth, and most importantly enjoying quality time and creating new memories with family and friends. To learn more about Ryan, connect with him on LinkedIn.
