Investing Club: The best investors balance a long view with a short focus. Here's how to do it

Published Fri, Mar 25 20222:05 PM EDTUpdated Fri, Mar 25 20223:35 PM EDT

Choppy markets are tricky for long-term investors. You need to stick with the game plan, ride out temporary downswings, bury your emotions. But investors also can't simply ignore the here and now. Russia is at war with Ukraine, gas prices have soared, and the Federal Reserve is planning to aggressively raise interest rates to combat the kind of inflation the U.S. hasn't seen in decades. These are all meaningful events that will impact markets and many companies for months or years to come. The solution: The best investors do both — maintain a long view while also focusing on the shorter term. While those two focal points may seem diametrically opposed and difficult to juggle, balancing them is, in fact, the key to navigating volatile markets. Here are some strategies to help you get into the proper mindset. Lessons from Covid lockdown As we transitioned out of the lockdown caused by Covid, we talked about the need to maintain a so-called barbell style portfolio. On the one end, we had stocks that benefited from stay-at-home dynamics. On the other end, we had stocks that benefited from reopening trends. The thinking was that whatever the latest headline, we would have one group that we could book profits in and another in which we could add to our positions. Fundamentally, we felt every position, regardless of which side of the barbell it was on, had strong underlying fundamentals and an attractive outlook. It just had different time horizons. Put another way, we never want to own a position if we don't have a positive view of the company or the stock's valuation. We are long only investors, meaning we hope all our positions will eventually go higher. We don't bet against stocks with shorts or with options. Tweaking our barbell style In the current volatile market, we can also apply this barbell but in a slightly different way. While we aren't thinking in terms of Covid lockdown versus reopening stocks, we can think in terms of economic sensitivity and duration. Economic sensitivity refers to the impact the strength of the economy will have on earnings. While all companies are inherently tied to the economy — given that the flow of capital is interconnected — some businesses are far more sensitive than others. Duration refers to how far out we have to look before any earnings become material. This may also be reflected in a higher valuation multiple. The further out the earnings are — and therefore the more we have to discount them to get to a present day value — the "longer duration" the stock is. We're not going to have a perfectly clean barbell — we didn't during the pandemic shutdown either — because economic sensitivity and valuation multiples don't have a perfectly consistent correlation. However, what we will attempt do is provide some food for thought that we hope will help members maintain their longer-term views while sharpening their ability to focus on shorter-term dynamics. For the sake of this exercise, let's consider one end of the barbell to be the "long-term view," and on the other the "short-term focus." Doing this will help us better think through which names are more deserving of our attention right here, right now, and which ones we can manage more passively. Long-term view stocks First the long-term view: These stocks will be the more passively managed names and identifying them is what will free us up to focus on those that require more active management. On this side of the barbell is where you're going to place those secular growth names. These stocks have shown an ability to execute and grow through any environment but don't usually see an outsized earnings boost when the economy heats up. They benefit from a strong economy but they don't go from zero-to-60 the way an oil exploration and production stock such as Club name Devon Energy (DVN) might. On this end, we might put names like Club names Alphabet (GOOGL), Amazon (AMZN), Salesforce (CRM), Nvidia (NVDA) and Apple (AAPL). Like we always say about Apple: Own it, don't trade it. So that stock is, of course, going to be among the more passively managed ones when the market environment becomes more difficult to navigate. While we're still monitoring key events, in the short-term the market is going to do what it is going to do but we believe that longer term, these profitable companies — key word here is profitable — will all continue to see earnings grow regardless of what the near term brings. Google-parent Alphabet will continue to gain share in cloud, advertising activity will continue to move away from print and linear television toward direct targeting and YouTube. Amazon will also benefit from cloud adoption, a growing ad business and the ongoing shift toward e-commerce. Salesforce will keeping growing as companies increase information te