Investing Through Uncertainty: Why a Plan Matters More Than Forecasts

Greetings!

The 4 largest annual losses of the S&P 500 throughout history:

1974 – down 25% 2002 – down 22% 2008 – down 37% 2022 – down 18%

What happened in the year following? 1975 – up 37% 2003 – up 28% 2009 – up 26%

What will happen in 2023? No one has any idea what will happen in 2023 with stock prices, inflation, interest rates, or the economy.

Just to be certain of this, at the end of 2021 experts were projecting the S&P 500 would increase in 2022 on average to 4825. On the high end, 5300 and on the low end 4400.

What did it actually close at? 3839.

There is a good quote from an economist who said, “Economic forecasting exists to make astrology look respectable.” No offense to astrologists.

If “experts” can’t predict what will happen accurately in the short term, what does that mean for the common investor?

What can we believe in? What can we do?

The good news?

There’s a different way to invest in a way that allows you to sleep at night, that allows you to ignore the predictions, the noise, the messiness of the ups and downs of the daily market.

To put it simply and to avoid panicking, keep your short-term money needs out of the investment markets. Keep your long term-needs invested in the markets.

After 1 year, the investment markets have been positive 68% of the time over the last century. After 10 years, the odds improve to 88%. After 20 years, it’s been positive 100% of the time.

This is what I believe to my core and it’s worth restating what our investment philosophy is founded on.

Part One: General Principles

We are long-term, goal-focused, plan-driven investors. We believe that lifetime investment success comes from acting continuously on our plan. We believe substandard returns, and even lifetime investment failure, come from reacting to current events.

The unforeseen and unforeseeable economic, market, political and geopolitical chaos of the three years since the onset of the pandemic demonstrates that the economy can never be consistently forecast, nor the market consistently timed.

Therefore, we believe that the most reliable way to capture the full return of stocks is to ride out their frequent but historically always temporary declines. These will continue to be the bedrock convictions that inform our investment policy, as we pursue your most important financial goals together.

Current Observations

Chaos continued in 2022. The central theme of the year was the Federal Reserve’s very aggressive efforts to bring inflation under control.

The U.S. stock market sold off sharply; at its most recent bottom in October, the S&P 500 was down 27%. (Bond prices also collapsed in response to sharply higher interest rates.)

It seems to me ironic that, after the nightmares through which the markets have suffered since the pandemic early in 2020, the stock market managed to close out 2022 somewhat higher than it was at the end of 2019 (3,939 versus 3,231, a gain of 19%). Not great, but not at all bad for three years during which our entire economic, financial, political, and geopolitical world blew up.

If anything, this tends to validate our core investment strategy over these three years has been: stand fast, tune out the noise and continue to work your long-term plan. That continues to be my recommendation, and in the strongest possible terms.

This also validates why we preach that any money invested in the markets, should be kept there for a bare minimum 3 years and ideally longer. Had you invested 3 years ago for something you need today, you would not be too mad about a gain of 19% on your investment. However, had you invested in January of 2022 for money you need in January of 2023, you’d be pretty upset about being down 18% right now.

The question of the hour seems to be to what extent the Fed, in its goal of fighting inflation, might tip the economy into recession at some point. Over the coming year, the way this plays out may determine the near-term trend of equity prices. My position continues to be that this outcome is simply unknowable, and that one cannot make rational investment decisions out of an unknowable.

That said, I continue to believe strongly that whatever it takes to put out the inflationary fire will be well worth it. Inflation is a cancer that affects everyone in our society.

Although this may be hard to remember every time the market spirals (and financial journalism overreacts) over some meaningless monthly economic data point, we are not investing in the macroeconomy. Our portfolios largely consist of the ownership of enduringly successful companies—businesses that are refining their strategies opportunistically to meet the needs and wants of an eight-billion-person world. I like that we have ownership in some of the greatest businesses of all time.

The only benchmark we care about is one that indicates whether you are on track to accomplish your financial goals.

The risk is not in the short-term swings of the market, but in the probability that you won’t achieve your goals. For example, outliving your money because keeping your accounts in cash is “safe”.

Our goal when we invest, is making sure we minimize the risk of you outliving your money.

All successful investors act continuously on their plan. All failed investors react continuously to the markets, and always the wrong way. It is not possible to react one’s way to investment success.

Human nature is always and everywhere a failed investor. The ability to create a robust lifetime investment plan – and the faith, patience, and discipline to keep from blowing up that plan at some fleeting moment of market/emotional stress – are not available to the unaided human mind. Our advice is the antidote to conventional thinking. Human nature’s first instinct will always be to think the opposite of what we suggest, that is how we know we are right. Interestingly, in every other area of life we become excited to buy things the more their prices fall.

These very human instincts produce disastrous investment outcomes – unless an Investment Counselor intervenes.

Something Interesting:

I recently read a story about an individual worth $100mil+ who became wealthy “overnight” through a startup being sold.

Their portfolio: Individual stocks: $45mil Index funds: $30mil Venture Capital Funds: $30mil Real estate: $15mil (includes primary residence, beach house and rental properties)

- Regrets trading individual stocks, it was fun to speculate but didn’t find it worth the stress - Doesn’t like real estate, not passive enough, didn’t want to deal with tenants, repairs, etc. - Regrets buying 2nd home, owning multiple homes causes more stress than pleasure, easier to just travel to different places and stay at hotels and Airbnb’s - Novelty wears off – 1st year bought all the toys, went on expensive vacations but over time his spending went down as the novelty wears off - Owning giant houses, multiple residences require maintenance and manpower, is it really worth the extra effort and does it actually bring joy? - Got bored – after retiring he got bored and depressed - Realized he needed a sense of purpose and routine

I hope you enjoyed our first Newsletter of 2023. I will continue to be your beacon of hope and preach that Optimism is the only Realism.

And as always —but can never say enough—thank you for being my clients. It is a genuine privilege to serve you.