This post by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.

Providing guidance or meaningful commentary on the current market is a bit like forecasting the weather in Palm Desert, California during August. Each day is very similar to the previous one until one day it isn’t. Moreover, with the VIX trading at 10-year lows and the indexes hitting new highs, it appears that the equity markets have become complacent to any rising geopolitical issues impacting the world: North Korean aggression, rising tensions with Russia, and Trump still believing that his presidency is a reality TV show complete with daily tweets and firings.

“Everybody wants happiness, nobody wants pain, but you can’t have a rainbow without a little rain.” –Unknown

With US equity markets hitting new highs, many market pundits are calling for caution – advising investors to move into cash and/or hedge their current positions. A market decline is not a bad thing. In fact, as long as a company’s fundamentals have not changed, Hazelton Capital Partners often takes advantage of market sell-offs as an opportunity to enter into or add to a current holding. It is important to remember that a market decline does not mean that every position will decline or decline in tandem with the market. Hazelton Capital Partners positions itself for a possible decline in the market the same way it prepares for a potential market rally by pruning back positions, selling out of companies whose investing thesis has failed or has been achieved, and redeploying the capital into new or existing positions. The first line of defense against a downturn in the market are the positions in the portfolio and the level at which those positions were purchased. Cash levels in the portfolio are an indication of market opportunities, not its future direction.

When focusing on a long-term investing strategy, one must understand that the path to financial success is littered with potholes, twists, and turns. The journey is not a continuous smooth trajectory higher. Sometimes, share prices need to go lower, allowing for capital to flow from weak to strong hands, before it can regain its momentum higher.

Besides running a concentrated portfolio, another major component of Hazelton Capital Partners’ portfolio management is to maintain a long-term investment outlook. A good deal of thought went into determining what constitutes a “long-term” investment horizon, especially in today’s short-term focused environment. A 5-year time horizon was chosen, in part, because it reflects a classic business cycle: 1-1.5 years of contraction, 1 year of recovery and roughly 3 years of expansion. Early into an investment, it is difficult to differentiate between an investment thesis that was “too early” or one that was “just plain wrong.”

Maintaining a 5-year investment horizon not only provides adequate time for an investment thesis to develop but after 2 years, it should become clear to an investor whether one’s investment thesis is accurate or unsound. The Fund recognizes that not every position will be held for at least 5 years; however, having a long-term outlook encourages investing patience and ensures that the expected investment return is commensurate with a long-term holding period. Currently, the average holding period for our top five positions is 3.5 years.