I love Christmas.
Maybe because I'm a big kid at heart.
Maybe because I'm an optimist, and Christmas always feels like the most optimistic time of year.
Maybe because I can't help but sing along to Christmas songs on the radio and in the shop.
(Proper Christmas songs, mind you – carols and Christmas standards. I draw the line at Mariah!)
Maybe because people are generally in a good mood, and it really does seem like the time when we get closest to peace on earth and goodwill to all.
I guess it's a little bit of 'all of the above', but it just makes me happy.
You know there's a 'but' coming, right?
I will return to the theme of Christmas between now and when the jolly man in the red suit scoots down our chimneys and comes in our back doors.
But I reckon there's just enough time between now and then to be, well, just a little Grinchy.
No, not about Christmas – that's sacrosanct.
But about the stock market.
Huh? The inveterate optimist getting Grinchy about the stock market? What gives?
Well, nothing, really.
Indeed, I'm as optimistic as ever about the long term prospects of investing in a diversified portfolio of quality businesses.
So, what's the Grinchy bit?
Well, I wanted to share just a little snippet of a conversation our investing team had this morning.
Our Director of Research, Ryan Newman, shared part of an APRA (the banking regulator) press release with the team:
"APRA wrote to the institutions' boards last June asking them to gauge whether the weaknesses uncovered by the CBA Prudential Inquiry also existed in their own companies. The landmark CBA inquiry had found that continued financial success dulled the bank's senses, especially with regard to the management of non-financial risks."
And he highlighted a key part of that paragraph. Namely:
"…continued financial success dulled the bank's senses…"
In other words? When things were going well, Commonwealth Bank of Australia (ASX: CBA) perhaps stopped looking as hard as it could at the potential points of failure.
It, perhaps, got carried away with the combination of good fortune and good management (and potentially an attractive and supportive external environment).
As a team, we agreed that we needed to be on guard against that sort of thing in other companies that we've recommended to our members.
But also, perhaps, in our own investing approach?
After all, the market's chugging along pretty nicely. It would be easy to get complacent.
To which, another of our team, Vincent, added the famous and pithy line, from Humphrey B. Neill:
"Don't confuse brains with a bull market"
In other words, a rising tide tends to lift all boats… even the ones that are only barely seaworthy. It's only when the winds pick up, the waves get bigger and the rain comes down in buckets that you find out whether you're really in the right vessel.
How's that for a little pre-Christmas downer?
After all, you've probably been investing for a while, and probably got belted by the COVID crash in 2020, and the tech slump in 2022.
Can't I just, for the love of all that's holy, let you enjoy a little time in the sun, with the ASX near record highs?
To which I reply… "No. No, I can't".
Sorry.
Why? Well, because I don't want to see you rigging up that old tub with a mast and spinnaker, and thinking you can tackle the proverbial Sydney to Hobart on Boxing Day.
"The boat's fine", you might tell me. "I haven't had an issue with it at all."
"In fact", you add, "It's never been better. And I'm a great sailor. I've had this thing purring all year. What could possibly go wrong?".
Now, I'm not trying to rain on your parade, Skipper. I'm glad you've had a great experience with it. I'm glad it's taken you to new places and new heights.
God knows, the storms that kept us off the water in the past seemed like they'd never let up. I don't blame you for sunning yourself on the deck and putting the darker days behind you.
But also, Skip, this beautiful weather is a great opportunity to make sure everything is, well, ship-shape before the next rains come.
See, I suspect you have some parts of your vessel that have a long life ahead of them. But if you have a look, I wonder if you might also find that others are wearing just a little?
A bit of rust, perhaps? Some loose screws? An engine that's been fine, but is really due for a service? Are those sheets (that's the ropes, for you landlubbers) really in the sort of nick they need to be? Is the safety gear all in the right places and accounted for?
But also, have you set the boat up for all conditions? Or have you kinda got used to the good times, and maybe let a few things slip?
And have you charted a course – mentally, emotionally, and physically – that's safe in all conditions? Or just while the sun is shining and the winds are kind?
Done with the tortured metaphor? Fair enough.
But you get what I'm saying, right?
I absolutely want you to enjoy your portfolio rising. God knows we deserve a little good news after a tough few years on the market.
But here's what else I want you to do:
I want you to really, really have a look at some of the valuations of the companies you own. Are they really worth that price? Or have you just got a little comfy because the market is telling you that you're a genius?
And check to make sure the companies you own really are as good as they seem. Or have they just done nicely over the past little while because a rising stockmarket tide lifts (almost) all share prices?
No, I'm not suggesting you sell just because share prices are up. The stock market hits new all-time highs all the time. Some of the best companies I own have hit high after high after high. But others? Well, in hindsight, I got carried away.
And I don't want you to time the market, either. I have no idea what happens in the short- or medium-term. But I have a strong conviction that the long term is bright for great companies in diversified portfolios.
Me? Well, we've recommended members sell shares in a couple of instances recently, because valuations simply got too stretched. We didn't have sufficient confidence that those companies would grow strongly enough.
We'll probably do it again in the next little while, if prices keep rising.
But we're not 'going to cash', either in the services I run, or in my personal portfolio. We'll be using the proceeds to buy other shares.
To switch go back to our metaphor, we're doing preventative maintenance. Any mechanic will tell you that a regular service is likely to be more effective (and far less painful) than an engine that breaks down or blows up.
Sure, the engine might seem like it's running smoothly… they all do, until they don't, any more.
Lastly, we're preparing ourselves for the all-but certain reality of the next market fall. Because I fully expect new all-time highs and semi-regular market falls in future. Why? Because that's what's always happened in the past. I see no reason to expect that to change.
The key is having a portfolio, and a temperament, that is ready for both, and can flourish over time, whatever the weather.
Remember, you want to replace the parts before they break, and do the maintenance so that you're prepared.
The time to fix the boat is while you're in port, or sailing smoothly… not once the storms are upon you.
As the Sea Scouts say, Be Prepared.
Fool on!
