The Triad Perspective

The stock market closed 2015 with the S&P 500 rising 1.4% and the all-cap Russell 3000 up 0.5%   Both indexes were increasingly driven (in our view) by narrow leadership from a handful of high-flying tech stocks.  The markets started the new year on a pronounced down note that has continued deep into January.  We believe that the irrationality of the market has been on full display in the past several weeks.
This decline in prices was not pleasant by any means.   But, in our opinion, for those with an investment versus speculative bent to equities, the decline presented ways to, as the saying goes, make lemonade out of January's lemon crop.  It's our opinion that sudden markdowns of stock prices without accompanying reductions in underlying business values are a friend to the long-term investor.  We continue to focus on identifying attractive businesses with "owner/operator" managers and seeking to buy them only at a material discount to our estimate of their value.
Regular readers may have noted a change to our monthly commentary format.  We welcome your feedback and comments. Please contact us if you have any questions or if you need any additional information.

John Feb 5
John Heldman, CFA
Partner | Portfolio Manager

Dave Hutchison, CFA
Partner | Portfolio Manager

File Index Funds Under E (for Emotion)

Many people believe it's impossible to do much better than the broad stock market indexes after considering the fees paid to active managers.  So, resigned to this plight, some investors place their hard-earned capital into index funds, designed to track the performance of an index such as the Dow Jones Industrials or the S&P 500.  

While indexing has merits, chiefly offering the ability to add to investments in a regular, low-cost approach, the challenge lies in the words of Pogo: "we have met the enemy and he is us".  In other words, people are often their own worst enemy when it comes to investing, and index funds are no escape from that fact.  

Why?  Since markets are occasionally irrational (if you doubt this, ask yourself why the stock market gyrates so much from week to week), the public will inevitably buy index funds at market highs, which the fund managers, since they are on auto-pilot, will use to purchase more of the same often over-priced stocks, pushing stock prices and valuations ever higher.  Holding cash is not an option for an index fund.  

This buying will generate short-term performance gains, which in turn will attract even more money into the index fund.  This self-perpetuating cycle of good performance drawing in more money, leading to more good performance will continue until it stops.  

Unfortunately, there hasn't been a crystal ball created to foretell when the music stops.  Ultimately, all good things come to an end.  When that happens, prices decline and investors begin to pull out, and since index funds hold very little cash, stocks will be sold to meet redemptions.
Well, you say, if I never sell my index fund, I won't be subject to the foolishness of others.  Partly true.  Even if you inoculate yourself against buying at the top and selling at the bottom, to the extent that other investors do flood the index fund with cash at the wrong times, your fund will be buying more overvalued shares at market highs and selling undervalued shares at market bottoms.  

Even if you sit tight and don't do a thing, the foolish decisions of others will impact the returns of your index fund.  Your returns will be diluted as the flood of cash is invested in overvalued shares.  Similarly, your returns will be negatively impacted when others liquidate shares at market bottoms and the fund must sell cheap shares to raise cash.  So yes, you will earn the index fund returns.  You just won't be too happy with the absolute level of the returns. 
A version of this game was played in the late 1990's as investors rushed to pour money into hot-performing index funds, along with "dot-com" companies.  The virtuous cycle continued for years, and by the time the investing public had been thoroughly convinced that 20% annual returns were a Constitutional right, the bubble burst.  

The lesson: there is no free lunch in the investment canteen.  Ultimately, to be successful, even index investors need to think for themselves, reducing exposure at market highs and increasing exposure during market declines.  Most investors are psychologically incapable of doing the opposite of the crowd.  It's lonely-no one else is doing this.  And scary-what if I'm wrong? As I've said many times before, this business is as much about behavior and emotional control as it is economics, financial statements and spreadsheets.

-John Heldman, CFA
About Triad

Triad Investment Management manages all-cap, small-cap and balanced portfolios with a focus on Research, Behavior and Ethics.  Triad is also the Adviser to the Triad Small Cap Value Fund (symbol TSCVX).  Founded in 2008, Triad is a 100% employee-owned SEC registered investment adviser.  Learn more at and


Past performance does not guarantee future results. Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request. 

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