The Triad Perspective

Indexes finished slightly lower since our April issue. Since we last wrote to you, the S&P 500 Index is down about 1% while the small-cap Russell 2000 Index is down slightly, less than 1%. Since the start of the year, the S&P 500 is up about 1.5% while the Russell 2000 is down close to 1%. We saw a mixed bag of reactions to corporate earnings reports in the past month.

Assessing the financial strength of businesses is an important part of our analytical process. In this month's essay we discuss how some companies fail but others thrive in trying times.

John Heldman, CFA

Partner | Portfolio Manager

Dave Hutchison, CFA

Partner | Portfolio Manager

Don't Cross The River (If you Can't Swim the Tide)

In yet another sign of aging - mine that is - I borrowed the title from a song by the pop group America, written in 1975. If you're over 40, you might remember them. If not, well take my word for it, they were, as Donald Trump might say, huge. Although I was never a big fan of America, my wife remains a loyal fan. I've been dragged twice in the past few years to see the boys - yes, they're still performing - at a local club.

Most of us have probably crossed a stream or river at some point in our outdoor lives. Sometimes you just don't know how deep it might be. Sometimes you do. Sometimes it can be fairly consistent. Other times, shallow in some spots, deeper in others. The point is, you need to be ready to handle whatever the stream or river throws at you. If it's deeper than you, you better be able to swim. When investing, being able to handle the low points can also be lifesaving.

Walk on water with a businessman walking on the surface of an ocean as a business concept of confidence and courage to take on an impossible challenge and achieve success with the power of belief.

Howard Marks is one of my favorite investors. He has a saying that sums up the problem nicely: "Never forget the six foot man who drowned crossing the stream that was five feet deep on average." Which is to say, you have to be able to get through the low points in the stream: recessions, market panics, industry downturns and other perilous waters that investors must navigate.

Bankruptcies have been on the rise in the past few years, despite reasonably good economic conditions. These financial meltdowns have been concentrated in certain areas, notably commodity producers and energy companies, such as coal, oil, natural gas, solar, etc. During boom times many of these companies loaded up with debt to expand, expecting (or hoping?) that the good times would last. And the good times did last. Until they didn't. The boom created the conditions for the ensuing bust. As happens so often.

Most of these players were banking on continuing prosperity, but not making allowance for adverse conditions. When problems arrived, these gamblers were caught in the financial equivalent of the game of musical chairs, lacking a chair when the music stops. Game over.

Bankruptcy is usually a complete wipeout for stockholders. Businesses with many years of success found themselves suddenly wiped out. Warren Buffett said it best back in 2005: "Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by zero always equals zero." You can have success for 10, 20 or 30 years, but if the financial grim reaper arrives, it's all taken away.

When we invest, we try to make sure that our companies can get through the deepest parts of the river or stream. We imagine worst case scenarios, and assess whether our companies are likely to survive. Even better, there are some companies with the financial wherewithal to not only survive, but strong enough to take advantage of opportunities that occur during market meltdowns, recessions or other difficult periods, when others encounter the deepest parts and succumb to a financial Mother Nature.

And remember, unless you are Donald Trump - who was twice on the ropes-bankruptcy equals zero.

-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 mutual 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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