2021 Q4 Newsletter

“This is Sparta!”, King Leonidas, 300

Allow me to preface our 2021 recap with a restatement of Spartan Law:

As long-term, goal-focused, plan-driven equity investors, we Spartans believe the key to lifetime financial success lies in continuously acting within the context of a Lifetime Financial Plan. Likewise, we believe financial failure inevitably proceeds from reacting to (let alone anticipating) economic and/or market events. And since the economy cannot be consistently forecast nor the markets consistently timed, the only way to capture the full and generous returns offered by mainstream equities is to ride out their frequent, but ultimately temporary, declines.

As evidence, during my lifetime, equities have experienced an average intra-year peak-to-trough decline of about 15%. One year in five, the decline has been about 30%. And every decade or two, they have plummeted by about 50% (1973-74, 2000, and 2008-2009). Yet in the 53 years since I was born, the S&P 500 has risen from under 100 in 1968 to today’s level near 4,800, delivering a compound annualized return just shy of 11%. These data underscore our conviction that the essential challenge to successful long-term equity investing is neither intellectual nor financial, but temperamental. As in most of life’s endeavors, patience and discipline ultimately determine investment success.

These principles form the bedrock of the behavioral and investment advice we provide year in and year out, no matter what the world throws at us. And never has this been more true than over the past two years.

With that as a premise, our reflection on the past 12 months would be incomplete without also considering 2020’s drama, induced by the greatest global public health crisis in a hundred years. As you recall, the world responded to the onset of the COVID-19 pandemic by essentially shutting down the global economy—placing it into a medically induced coma. Predictably, this resulted in the fastest US economic recession ever, coupled with a 34% decline in the S&P 500 over just 33 days.

Almost immediately, Congress and the Federal Reserve responded with a tidal wave of fiscal and monetary stimulus that had no historical precedent. This point cannot be overstressed: We are currently in the midst of a grand fiscal experiment that renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. If there were ever a time to just put our heads down, ignore the noise, and work within the context of our Lifetime Financial Plans, this is surely it.

Nonetheless, we remain unwaveringly optimistic heading into 2022. If 2020 was the year of the virus, 2021 was the year of widespread vaccination and acquired natural immunity. So it seems likely that in the coming year (1) the lethality of the virus will continue to wane; (2) the world economy will continue to reopen, easing pressure on the supply chain; (3) corporate earnings will continue to advance; (4) the Federal Reserve will drain some excess liquidity from the banking system, with some resultant increase in interest rates; and (5) inflation will subside somewhat.

However, if my 24 years in this industry have taught me anything, it is to expect the unexpected. So, although the above conditions appear likely, I am 100% certain that currently-unknowable political decisions, global conflicts, economic shocks, and/or natural disasters will emerge in 2022, disrupting the economy’s trajectory and triggering volatility in our equity portfolios. Fortunately, when (not if) these occur, our recommendations will remain unaffected, since our advice is driven entirely by the Lifetime Financial Plans we have carefully engineered, not by current events.

That said, my personal observation is that these have undoubtedly been the two most shocking and terrifying years for investors since the global financial crisis of 2008-09. You simply would not be human if the outbreak of the pandemic, the bitterly partisan election, the onslaught of new variants, and/or the highest inflation in 40 years hasn’t caused you at least some level of anxiety. But although these feelings are perfectly normal, our mission is to vaccinate you against the true threat to your financial independence: the panic virus. Fortunately, Panic Is Forbidden at DEM.

Thank you for being our clients. It continues to be both an honor and a privilege to serve as your family’s trusted advisor. We wish you and your families nothing but the best in 2022!

Don Davey
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise