2019 Annual Letter
Part One: General Principles
· As usual I want to restate 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 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.”
· Once a client family and I have a plan in place—and have funded it with what have historically been the most appropriate types of investments—changes in the portfolio will be limited so long as your long-term goals haven't changed. As a general statement, I've found that the more often investors change their portfolios (in response to the market fears or fads of the moment), the worse their long-term results.
· 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 promising 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.
Part Two: Current Observations
· 2018 was a paradox. It was a great year for the American economy, and by far the best one since the global financial crisis. It was also a year in which the equity market could not get out of its own way.
· Several major metrics of the economy grew in 2018. Worker productivity, which is the long-run key to economic growth and a higher standard of living, surged. Wage growth accelerated in response to a rapidly falling unemployment rate. Household net worth rose above $100 trillion for the first time, yet household debt relative to net worth remained historically low. Finally—and importantly—the number of open job listings exceeded the number of people seeking employment.
· Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%. Cash dividends set a record; total cash returned to shareholders from dividends and share repurchases since the trough of the financial crisis reached $7 trillion.
· But the equity market had other things on its mind. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018—probably somewhat ahead of itself, as it seemed to be discounting the entire future effect of corporate tax cuts in one gulp. There ensued in February a 10% correction, followed by several months of consolidation. The advance resumed through the summer, with the Index reaching a new all-time high of 2931 in late September. It then gave way to a second correction of 15% finishing the year at 2506.
· The major economic and market questions going into 2019 are Trade policy and Fed policy? Trade policy which in the larger sense is an inquiry into the mind of President Trump. Fed policy and an aging expansion were weighing heavily on investor psychology as the year ended.
· For what it’s worth, my experience has been that negative investor sentiment based on these policy concerns—and the resulting equity price weakness—have usually presented the patient, disciplined long-term investor with enhanced opportunity. As Warren Buffet wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”