2018 Annual Letter
In light of the recent market and political environment I wanted to send a letter to begin the year. In keeping with the nation’s current administration, you will find this in bullet points and no more than 2 pages!
· I thought it would make sense to reiterate the nature of my philosophy of advice. Generally speaking, my experience has been that over time, successful investing is goal-focused and planning-driven, while most of the failed investing I’ve observed was market-focused and performance-driven.
· Another way of making the same point is to tell you that the really successful investors I’ve known were acting continuously on a plan—tuning out the fads and fears of the moment—while the failing investors I’ve encountered were continually (and randomly) reacting to economic and market “news.”
· I believe my highest-value services are planning and behavioral coaching—helping clients avoid overreacting to market events both negative and positive.
· Going back to 1980, the average annual intra-year decline in the S&P 500 has exceeded 14%. Yet even without counting dividends, annual returns have been positive in 29 of these 38 years, and the Index has gone from 106 at the beginning of 1980 to 2674 at year-end 2017. I believe the lesson —historically, at least—has been that temporary market declines have been very different from permanent loss of capital, and that the most effective antidote to volatility has simply been the passage of time.
· I see the nature of successful investing as the practice of rationality under uncertainty. We’ll never have all the information we want about what’s going to happen and we invest in and for an essentially unknowable future. Therefore, we practice the principles of long-term investing that have most reliably led to favorable long-term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be the fundamental building blocks of my investment advice in 2018 and beyond.
· A year of global growth. The year 2017 was noteworthy in that for the first time in this century, all the major economic areas of the world were growing simultaneously, albeit at different rates. Before this and at different times, Europe, Japan or the emerging markets dealt with significant headwinds, and growth here in the US was sluggish. I feel the synchronization of global growth is an underappreciated positive that is continuing.
· The U.S. accelerates—and feels better about it. Steady hiring has driven the unemployment rate down to 4.1% for 3 months at this writing, putting the economy on track for a potential third straight quarter of 3% growth. The consumer, by all important measures, is feeling better about things than they have since before the Great Recession, and retail sales are quite robust. Household net worth in the fourth quarter may have reached $100 trillion. Consumer balance sheets continue to be healthy and business investment is accelerating at long last.
· The Federal Reserve begins normalizing. In 2017 the Federal Reserve began unwinding its balance sheet and letting interest rates follow their normal course in an expanding economy, so far without ill effect.
· A genuinely great year for equities—with muted volatility. The deepest intra-year price decline for the S&P 500 was 3% (versus an average of 14% since 1980), our philosophy of staying the course was well rewarded in 2017, with a bare minimum of volatility. We remain positive on the equity market for the coming year. That said, I can’t imagine returns in 2018 will match this past year, or that volatility will remain this mild.
I plan to get back to posting regular blogs and market updates in 2018, but please let me know if you have any questions and here’s to wishing everyone a healthy, safe and prosperous 2018.