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Klingman Insights

Owning Equities in our Portfolios

December 26, 2018

We wrestled with sending out an email during the holiday week and sincerely hope that you are spending time with family and friends and not reading this. However, with the sharp decline in equity prices over the past several weeks, we wanted to make a few comments regarding our exposure to equities in client portfolios.

The financial press (and even our own commentaries at times) will spend a great deal of time discussing indices, markets, volatility and macroeconomic events that may affect equity prices in the short term. Through this noise, it can be easy to forget that the stock market is a made up of thousands of individual companies each operating their own independent businesses. As long-term investors in equities, we own interests in a highly diversified set of these companies and the profits they generate.

By way of example, through our investments in ETFs and/or mutual funds, virtually all of our clients will own a small part of Apple in their portfolios. Just as they will own a small part of the other largest US companies by market capitalization including Microsoft, Amazon, Berkshire Hathaway, Visa, etc. On October 3, less than three months ago, Apple’s stock price peaked at $233 per share. On Monday, Apple’s stock closed at $146 per share representing a 37% decline. Although there has been some minor negative news associated with the business over this time, it is hard to conceive that the underlying business is somehow worth 1/3 less than it was three months ago. Apple is still selling phones and services (which many of you will use to read this email) and analysts project the company to earn approximately $13 per share in profits in 2019, pay approximately $3 of that in dividends to its shareholders, and continue its large scale share buyback program.

We provide these numbers, not because we are specifically recommending buying Apple stock. We are not. We recommend owning highly diversified portfolios to reduce the risk of owning specific securities. However, as equity investors we ultimately own parts of hundreds of companies like Apple and own interests in their future earnings and dividends. While the stock prices of these companies may be subject to extreme volatility in the short term, we believe the patience of owning and maintaining equity interest in these businesses over the long-term is the secret to success for investors.

Enjoy the holidays.

Best,
Gerry

 


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