The Triad Perspective

The last chunk of March through tax time in April (thoughtfully extended this year by the IRS to April 18) saw stock prices continue to head upward. Since we last wrote to you, the S&P 500 Index is up about 2% while the small-cap Russell 2000 Index is up about 4%. We believe the market is continuing to realize the value of some of the companies it ignored at the start of the year. Modestly rising oil prices are contributing to the stock price recovery.

Now is the time to be particularly careful in security selection. There is a difference between the return potential of an index and that of a group of carefully chosen companies. The companies that Mr. Market shuns in the near-term can be a source of future return potential. This is the area we cover below in this month's essay.

John Heldman, CFA

Partner | Portfolio Manager

Dave Hutchison, CFA

Partner | Portfolio Manager

Off A Cliff: The Mathematics of Rebounding

Jimmy Cliff is one of my favorite reggae musicians. While not a household name except perhaps in his native Jamaica, Jimmy has written a few popular tunes. Perhaps you've heard his song "The harder they come, the harder they fall"? (Check out Jerry Garcia's version.) This applies to markets, as in the bigger the bubble, the bigger the bust. Think of the Great Internet Bubble of the late 1990s, the Housing Bubble of the mid 2000s, or the Commodities Bubble which is still deflating and continues to leave a mess in its wake.

Bubbles are easy to see in hindsight. And they're often easy to spot during the inflation period. But our emotional blinders can make it difficult to take action before the proverbial popping happens. It's human nature to try to rationalize an event, especially if you're making lots of money during the bubble. Complacency takes over as bubbles can take years to slowly inflate. Good ideas - the internet revolution, housing attractiveness given low interest rates, Chinese demand for commodities - tend to get carried too far, enticing new investors attracted to easy gains, further inflating the bubble, pulling in more investors, until, voila, bubble-mania suddenly, inexplicably, pops. Recognizing bubble signs is important but taking action is critical.

Credit: Richard Heeks

But there is a silver lining to every bursting bubble. It's called opportunity. As the bubble bursts, what was popular now has the look of detritus, and portfolios are flushed of the offending items. Out go the Internet stocks, or housing stocks, or commodity producers. Forced liquidations by hedge funds and other leveraged investors can result in significant price declines.

Faced with several years or more for prices to rebound, many investors -speculators? - forswear any interest in the now collapsed investment area. Just as buying begat more buying, selling begets more selling, driving prices down further and further. Confidence, excitement and jubilation is replaced with desperation, despondency and despair. The boom to bust cycle is complete.

And so, the harder they fall, the harder they rebound? So it might appear. Of course there are no guarantees that prices will return to previous lofty levels. Intel, Microsoft, Cisco Systems and others still sell for prices well below the levels reached in the late 1990's, nearly 20 years ago!

But for astute, disciplined investors, the current carnage of a burst bubble can provide opportunity. Here's how the math works. A $100 stock that drops 50% will earn a 100% return if it appreciates back to $100. Even better, if that same stock drops 75% to $25, a return trip to $100 works out to a 300% return. Again, no guarantees, but the attractiveness of bombed out areas is twofold: first, decimated investments have likely reduced downside risk of permanent loss of capital (the definition we use at Triad) through previous price declines; second, the greater the declines, the greater the potential returns should prices rebound back toward their initial level.

Thus, to turn Mr. Cliff's song title on its head, the harder they fall, the harder they rebound. Not always, but it's an area that enterprising, long-term investors should consider.

-John Heldman, CFA

About Triad

Triad Investment Management is a 100% employee-owned SEC-registered investment adviser. We serve families, individuals, & foundations. Triad manages all-cap, small-cap and balanced portfolios with a focus on Research, Behavior and Ethics. We serve as the Adviser to the Triad Small Cap Value Fund (symbol TSCVX). Learn more at www.triadim.com and www.triadfunds.com.

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 SEC-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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