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Newsletter: 01/03/2023

Warren Buffett, one of the greatest and most famous investors of the modern era, was once quoted as saying: “The stock market is a device for transferring money from the impatient to the patient.” That may never be truer than today. Certainly 2022 was a year in the markets (all markets, not just the stock market) for the record books. Bonds, normally the safety valve for falling stock markets, had a record bad year, in accompaniment to the various stock indexes declines of 20-30+%. For us, the patience is also warranted as to the bond market. For years, we had to counsel clients that with interest rates at records lows, the bond market had a 40-year tail wind (interest rates down, bond prices up). Then with the shift in Fed policy in 2022, and the unprecedented speed with which it raised interest rates, the bond market took a dive. As to when and by how much the Fed will eventually lower interest rates is an unknown, but historically the Fed has lowered interest rates to stimulate the economy out of a recession or to soften the blow from an exogenous shock (the COVID pandemic is a perfect example). So, with a high probability it will happen, we just cannot guaranty when or to what degree, bond prices will be invigorated higher and with lowering interest rates, typically the stock market too.

In light of the foregoing, we thought we would share a few paragraphs out of our investment thesis that is the guiding principle when we meet to discuss our research and possible investments to include in portfolio allocations.


It is human nature that there are two voices in your head. There is the logic, and there is the emotion. You can think of it as the two people on your shoulders shouting at you what they think you should do. Logic tends to be longer-term, more rational, and well thought out, whereas emotion is something that we feel over a shorter-term period. And what is interesting is most people make decisions based on their emotion. This is where a good advisor is critical, they help clients to be more rational, to offset some of the pressure that comes from the short-term emotion by saying, “No, I know you are feeling this way, but history and logic tells us to stay with the plan.”

Further to client education, from our study of behavioral finance, we just do not think humans are wired to think in long-term increments, and so, in our business, we must advance what is counterintuitive to our clients. Unlike any other service that you receive where you can evaluate the outcomes over short time frames, for example, you go to the dentist and it is clear whether your dentist knew what they were doing, and so you make the decision based on that one outcome whether or not to go back. Whereas, with financial advice when looking at market outcomes, there is so much noise in terms of any particular outcome relative to whether something is working that it drives people to make decisions on a short-term basis, like they do in every other aspect of their lives. And that is very reasonable to do this with most services and products they receive in life. However, in the markets, if you simply do the thing that is working and avoid the thing that is not working, you may end up with the worst possible outcome. So, this is difficult for most people to do in a disciplined way without a good advisor to help them understand the implications of emotional decision making. We frequently present clients with multiple alternatives to their portfolio construction, each with different risk and reward characteristics. Which one is best? We will not know for years until we have the benefit of hindsight…and the answer may be different depending upon whether the look back period is 3-5-10+ years. As an example, if we use one of the world’s most famous investors, Warren Buffet’s Berkshire Hathaway, over the last 5 years (an eternity for many clients) the S&P 500 has outperformed Berkshire Hathaway. However, over the past 20+ years, Berkshire has outperformed the S&P 500 by almost 3.5% per year, which equates to a share value more than two times the S&P 500. Patience, having faith in the process, strategic asset allocation coupled with tactical tilts in consideration of economic and market cycles is the value we strive to add as we interpret the enormous amount of daily economic and market data.”


Happy New Year! Our best wishes for a happy, prosperous, and healthy new year.


Sincerely,

Dave & Drew

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