The Search for Security

The Search for Security

Where can investors find safety?

Photo: Josh Rogan. Source: Morguefile

The answer to this question is far from obvious. In the past fifteen years we’ve seen spectacular failures among both large and small companies: Lehman, Fannie Mae, Quicksilver. And even more companies have fallen dramatically in price and never recovered, like Citigroup or AIG. Now the entire energy sector may be downgraded. When the giants fail, where do you go for safe, blue-chip growth?

The short answer is, there’s no such thing as safety. There were some spectacular failures 20 or 30 years ago, but our selective memories erase them—and the subsequent recovery—because, well, we just forget. Also, our minds tend to recall facts that have strong emotional associations. A tree falling in the forest a mile away isn’t as loud to us as a limb from the maple out front crashing down on our car in the driveway. And a growing tree doesn’t make any sound at all.

Stout Memorial Grove. Source: Wikipedia

Are small companies the answer? Small firms have less experienced managers and more volatile business conditions. They tend to be regionally focused, so local economies affect them more. Since they slip under the radar screens of many auditors, accounting fraud and malfeasance are more likely. As a result, business failures among small firms are much more common. They also grow at a faster rate, though, since expansion isn’t limited by the size of the economy. It’s easier for revenue to double from $5 million to $10 million than from $500 billion to $1 trillion.

So small stocks are more volatile. Investors who buy them need to pay close attention to their balance sheets, business plans, and manager integrity. But there are no sure things in investing. It’s all a matter of managing risk while you look for returns.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:09+00:00 February 4th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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