Dear reader,
Happy New Year! I want to begin the first newsletter of 2020 by expressing how excited I am for the year ahead. I have some very big news that I will share with you very soon!
Part One: General Principles
As we embark on the new year (the Roaring 20s!), I’d like to restate my principles about investment advice so we are all on the same page. As investors, we ARE goal-focused and believe in long-term equity investing. We understand that investment success comes from continuously acting on a written plan and not reacting to current events or worrying about the market. We do not attempt to forecast or time the equity market as we believe this is difficult.
The only way to be sure of capturing the full premium return of equities is to ride out their frequent but ultimately temporary declines. We must change our definition of “risk.” Risk should be measured as the probability that we won’t achieve our goals—not by the market’s yearly ups and downs. Investing should have the exclusive goal of minimizing that risk.
By my count, there have been 15 bear markets in equities since the end of World War II. This averages out to about one every five years or so, with an average decline of 30%. But in September 1945 the forerunner of the S&P 500 Index was about 161, the Index ended this past year at 32302. This translates to about an 11% annual average growth rate. Thus, at least historically, the permanent advance has triumphed over the temporary declines!
Part Two: 2019 Recap
2019 was, in important ways, the mirror image of 2018. The American economy (including corporate earnings and dividends) performed beautifully in 2018. Despite this, the S&P 500 index was down a little over 4%3 after experiencing a 19.8% peak-to-trough decline through Christmas Eve. This past year was the exact opposite: an exceptionally good year for the market – up 31.49% even though the economy slowed somewhat, manufacturing went into decline, and the earnings of the S&P 500 almost certainly ended 2019 down slightly year-over-year.
Two major points in this summary:
- The media and financial pundits spent the year scaring investors with trade wars, an impending recession, impeachment, and election uncertainty. My conclusion: turn off the news. No wisdom is there. At best, it’s entertainment, and at worst, it’s a destructive distraction.
- It is, therefore, no surprise that net liquidations of U.S. equity mutual funds and ETFs soared to levels not seen since the Great Panic of 2008. This, mind you, after 10-plus years of 16% compound annual returns for the S&P 500. Of course, my clients did not do this with the assets I have the privilege of managing for them. Kudos.
In summary: Be of good cheer. It is probably that 2020 won’t match 2019. Few years ever mirror the prior one. But that is wholly irrelevant. The truth is that we goal-focused, planning-driven investors had an exceptional year in 2019. We did so not by forecasting or timing but rather by hewing to our long-term equity discipline. That, to me, is the great lesson of this genuinely great year. Optimism is still the only realism.
Thank you sincerely for being my clients. It is an honor and a pleasure to serve you.
Sources
1. “S&P 500 at your fingertips” tab of www.politicalcalculations.com. The data are from Nobel laureate Robert Shiller.
2 & 3. Steele Systems: 12/31 Notebook
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The Monkees – Daydream Believer (Official Music Video)
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The Raid | Official US Trailer HD (2011) (movie recommendation)