2013 Q3 Newsletter

Investor Behavior versus Investment Performance

The third quarter of 2013 came to a close in the midst of a standoff in Congress over Obamacare, the budget, and the debt ceiling, raising the possibility of the first US government shutdown in seventeen years. Yet not even this dysfunction in Washington has been enough to derail 2013’s impressive global equity market rally. Despite a tepid macro-economic recovery, the Blue Chip stocks that comprise the S&P 500 have surged almost 20% on the year, their more nimble small company brethren have rocketed roughly 30%, and international companies have gained roughly 15%. By contrast, rising interest rates, the anticipation of the end of the Federal Reserve’s quantitative easing program, and the possibility of the United States defaulting on its sovereign debt interest payments have pushed most fixed income indices into negative territory for the year. As in the case in about seven out of every ten years, owning shares of Great Companies via equities has proven to be much more profitable than lending money to governments via bonds thus far in 2013. All seems right in the world.

But the world seemed dramatically different just nine short months ago. Recall the sharp sell-off in the markets shortly after President Obama was re-elected in November, heightened concerns over the mounting debt crisis in the Eurozone, and CNBC’s on screen countdown to the Fiscal Cliff deadline and the Economic Armageddon it was sure to induce. Although we had no idea how these circumstances would eventually unfold, we remained stubbornly optimistic about the only thing that ever matters: Great Companies around the world like General Electric in the USA, Allianz in Germany, and Toyota Motor in Japan would adapt to changing circumstances by innovating, expanding, and improving profitability. And because higher profits and dividends are ultimately reflected in the form of higher share prices, we confidently insisted that you hold on to your beautifully diversified equity portfolio while this whole mess played itself out. Unlike the many poor misguided souls sought shelter in the illusionary safety of bonds, each and every one of you heeded the counsel of your Trusted Advisor.

Just as their decision to abandon equities at precisely the wrong time doomed the fear mongers, your decision to trust in our Plan ensured your success. As investors, we have absolutely no control over the economic, political, and natural events which dictate the short term gyrations of the markets. But we have complete control over all of the factors that ultimately determine our wealth: owning a globally diversified equity-dominated portfolio, contributing to it regularly during our accumulation phase, limiting withdrawals to sustainable levels during our distribution phase, and most importantly, adhering to our disciplined approach through thick and thin. Our job is to ensure that your behavior always aligns with your long term goals regardless of short term performance.

Speaking of behavior, I urge each of you to invest four minutes in watching the brief video below entitled “200 Countries, 200 Years.” It is impossible to view this and not come away with an even greater sense of optimism about the long term future of the global economy…despite the ongoing bickering in Washington. Please enjoy!

Don Davey
Senior Portfolio Manager
Disciplined Equity Management

Plan Wisely, Invest Intelligently, Diversify Broadly, Ignore the Noise