2020 Annual Letter to Our Clients

2020 Annual Letter to Our Clients

2019 Year in Review

As we begin the new year and decade, we think it’s important to revisit the general principles which govern our philosophy of investment advice. We all need a good reminder of our investment resolutions that we will adhere to not just in January, but for the all the months, years, and decades still to come.  To provide some context, we have also included a review of some of the market and economic data from 2019 as we personally observed them.  This is not to be taken as any sort of market forecast. (As we always say, we are planners, not prognosticators.)

Evergreen Investment Principles:

  • It will be worth restating, even in the context of a letter primarily focused on the year just past, our firm’s overall principle of investment advice. It is goal-focused and planning-driven, much different from an approach that is market-focused and current-events-driven. Long-term investment success comes from continuously acting on a plan. Investment failure proceeds from continually reacting to current events in the economy and the markets.
  • You and I are long-term equity investors, working steadily toward the achievement of our lifetime goals. We make no attempt to forecast, much less time, the equity market; indeed, we believe these to be fool’s errands.
  • By our count, there have been 15 “bear markets” in equities since the end of World War II—an average of one every five years or so. The average depth of these declines was something on the order of 30%. But in September 1945 the forerunner of the S&P 500-Stock Index was about 16¹; the Index ended this past year at 3,177¹. Thus, at least historically, the permanent advance has triumphed over the temporary declines. Since we accept that the equity market cannot be consistently timed by us or anyone, we believe that the only way to be sure of capturing the full premium return of equities is to ride out their frequent but ultimately temporary declines.
  • Our essential principles of goal-focused portfolio management remain unchanged. (a) The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success. (b) The only benchmark we should care about is the one that indicates whether we are on track to accomplish our financial goals. (c) Risk should be measured as the probability that we won’t achieve our goals. (d) Investing should have the exclusive goal of minimizing that risk.

Observations from 2019:

  • The year 2019 was, in many ways, the mirror image of the previous year. 2018 was a dramatically outstanding one for the American economy—and for corporate earnings and dividends—despite which the equity market couldn’t get out of its own way and ended on a terrific downbeat. (i.e. 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 30.43%—even though the economy slowed somewhat, manufacturing went into decline, and the earnings of the S&P 500 ended 2019 down slightly year-over-year.
  • Without laboring the market’s course over the entire year, it was, in essence, a sequence of three important forays into new high ground. First, it made up all of 2018’s drawdown and broke out at the end of April. It then corrected sharply. Another series of new highs followed in June-July and continued into the fall. The third and most dramatic breakout took place at the end of October and ended 2019 on a high note with a banner year.
  • These three successive waves of new highs seem to us to suggest that a slowly growing realization that widespread fears of major disaster—trade wars tipping the economy into recession, a significant year-over-year downtick in earnings, and a constitutional crisis regarding impeachment—were overblown. This was particularly true, we think, with respect to the late October breakout. That upswing was ignited by third-quarter earnings decline that proved far milder than almost anyone had forecast, and two successive blowout monthly jobs reports.
  • Set aside momentarily, if you can, the headline issues of the day: the trade situation, an aging bull market, impeachment/election uncertainty, and the like. These are not merely uncertainties; they’re irrelevant to long-term, goal-focused investors like us.
  • Be of good cheer. It is overwhelmingly probable, as financial journalists have been shrieking of late, that 2020 will not match the returns of the past year. Few years ever do; that is both manifestly true, and wholly irrelevant. The fact is that we goal-focused, planning driven investors had an exceptional year in 2019. We did so not by forecasting this year’s returns—nor by jumping into the market just in time to get them—but by patiently adhering to our long-term equity discipline. That, to us, is the great lesson of this genuinely great year.

Thank you, most sincerely, for being our client. It is an honor and a pleasure to serve you.

¹Source: “S&P 500 at your fingertips tab of www.politicalcalculations.com. The data are Nobel laureate Robert Schiller’s.

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