To our clients:
In our current newsletter we discuss in general terms our view of the risks presently inherent in the stock market. This letter explains our investment strategy in terms of its effect on your own account. As you know, the cash position in your account has been increasing, and is now a large portion of your investments. You may question why this is so, since the stock market has been rising strongly following its recent setback.
It is precisely because the market has been rising for many years that we have been net sellers of stocks in recent months. We are content, even pleased, to withhold your cash, as well as our own, from the stock market until we can buy shares that have upside potential in excess of downside risk. Just the reverse is true now for most of the best stocks, namely the downside risk exceeds the upside profit potential over the next few years.
Of course, whatever we might buy today, no matter how over-valued the market price, might go even higher in the short-term future. But to buy stocks at prices that are not justified by long-term investment values is nothing but a speculation that the current irrationally high pricing will become even more irrational. We choose not to risk your hard-earned money in that way, nor to subject your fortune to the very real possibility of a major decline in market value. It is not a question of whether the market will suffer a major decline, but only of when and how much the decline will be.
We are not shunning all stocks, not predicting a crash. But we will continue to insist on good investment value before parting with your cash to buy stocks. Patience will not only protect your capital, but will also maximize its long-term profitability while building stable, durable growth in the value of your portfolio.
CHEVIOT VALUE MANAGEMENT