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2015 Q4 Newsletter

50 Years and 10,000% Returns

As I inch closer to the second half of the hundred years I plan to be on this earth (optimists always triumph!), I find myself stepping back to look at the big picture more and more often. So rather than reflecting on only the events of the past twelve months as I usually do this time of year, I would like to offer a much broader perspective by recalling some of the political, cultural, and business conditions in the US at the midpoint of each of the past five decades:

In 1965 Lyndon Johnson unveiled his vision of a “Great Society,” the war in Vietnam was escalating, Ed White became the first American to walk in space, the Beatles began their US invasion, Muhammad Ali defeated Sonny Liston, and race riots erupted in Watts, California. Amidst these uncertain times, CEO Donald Kendall orchestrated an unprecedented merger between an iconic soft-drink maker and a leading snack brand … and the global giant PepsiCo was born.

In 1975 Gerald Ford escaped two assassination attempts within seventeen days, Saigon fell, Saturday Night Live debuted, and an American spacecraft and a Soviet spacecraft linked up in space. After dropping out of Harvard, entrepreneur Bill Gates formed a little company with his friend Paul Allen that would go on to develop the software that powers 90 percent of the world’s desktop computers … and the software behemoth Microsoft was born.

In 1985 Ronald Reagan met with newly empowered Mikhail Gorbachev in Iceland, the Internet domain name system was created, the first human heart transplant took place, and The Coca-Cola Company introduced arguably the biggest flop in marketing history, New Coke. Ignoring his doubters, the second of nine children opened a small chain of retail clothing stores called People’s Place in New York … and the Tommy Hilfiger empire was born.

In 1995 Bill Clinton was entering the final year of his two-term presidency, Timothy McVeigh detonated a fertilizer bomb outside the Alfred P. Murrah Federal Building in Oklahoma City, the murder trial of former NFL star O.J. Simpson began, the Rock and Roll Hall of Fame opened in Cleveland, and Israeli Prime Minister Yitzhak Rabin was assassinated. Fed up with the demands of his prominent position at a Wall Street hedge fund, Jeff Bezos scribbled a business plan on the back of a napkin to sell books directly to customers via the Internet … and the world’s largest online retailer, Amazon, was born.

In 2005 George Bush delivered his second inaugural address, Hurricane Katrina devastated New Orleans, Saddam Hussein went on trial for his life, London experienced its own version of 9/11 when terrorists killed 52 people on a subway, and Pope John Paul II passed away. On a whim, obscure electrical engineering graduate students Jerry Fang and David Filo launched a website called “Jerry and David’s Guide to the World Wide Web” … and a little search engine named Yahoo! was born.

In 2015 Barack Obama presided over a nuclear agreement with Iran, Greece became the first developed nation ever to default on an IMF loan payment, Islamic terrorists declared war on the West via brutal murders in both Paris and Sacramento, oil prices fell by nearly half, and Federal Reserve Chairman Janet Yellen increased the federal funds rate for the first time in seven years. Yet history will soon tell the tale of how some unknown capitalist, working in a lab, on a server, or in a garage (perhaps even on the day the Dow Jones Industrial Average dropped more than 1,000 points) had the inspiration for a company that would go on to become a household name; employ thousands of people; generate billions in sales, earnings, and dividends ... and increase the intrinsic value of the S&P 500 just as Great Companies like PepsiCo, Microsoft, Tommy Hilfiger, Amazon, and Yahoo! have done:


Viewed from this perspective, we see that the spread of free market capitalism around the globe, an ever-growing population, longer life expectancies, and exponential progress in technology have combined to propel the S&P 500 to a 10,000% total return (with dividends reinvested) over the past half century. Despite enduring no fewer than eleven temporary declines of 20% or more, disciplined long term investors have permanently grown their capital a hundredfold. And lest you believe that their best days are behind us, consider the infinite possibilities awaiting tomorrow’s Great Companies with access to virtually unlimited computing power and storage, tremendous advances in biotechnology and nanotechnology, and an increasingly energy-independent United States. As if by magic, the invisible hand of capitalism is currently spawning new companies in entirely new industries that yesterday’s entrepreneurs could never have dreamed of: space tourism, driverless cars, holographic imaging, and on-demand 3-D printing, just to name just a few. It is truly an amazing time to be an entrepreneur … and by extension, an investor.

And so we march boldly into 2016 armed with a fifty-year perspective screams “The optimists always triumph!” Let the doom-and-gloomers cower behind the eroding purchasing power of their cash, CDs, and bonds while we confidently embrace the inevitable wealth creation of our globally diversified equity portfolios. As the brilliant computer scientist Alan Kay said, “Perspective is worth 80 IQ points.” Happy New Year!

A few administrative notes as we head into 2016:

Portfolio Performance: After posting double-digit gains in each of the past five years, US large-cap stocks took a breather and finished 2015 right about where they started in January. And for the second consecutive year, intelligently diversified portfolios delivered returns slightly below those of the S&P 500. So be it. Remember, our goal is to provide you with broad exposure to the Great Companies of the world by constructing portfolios that include not only US large, but value, small, international, and emerging market equities as well. Because last year’s leaders eventually become laggards (and vice versa), we will continue to rebalance our portfolios as appropriate.

eMoney Advisor: We are excited to announce that we have added the cutting-edge eMoney Advisor financial planning, data aggregation, and document-sharing software suite to our practice. Using the technology of eMoney Advisor, we will be able to organize your finances more efficiently and seamlessly integrate that information into our financial plans. This industry-leading wealth-management solution is truly dynamic and will allow us to provide you with the transparency and accuracy of information that you deserve, twenty-four hours a day, seven days a week. We are very excited about this implementation and will be contacting you soon to introduce you to your personalized eMoney Advisor portal. We know you will find this an even better way for us to work together.

Star Wars Update: Last quarter I wrote about the pending release of the seventh installment of Disney’s Star Wars franchise, The Force Awakens. In just its first three weeks on screen, the film has already earned over $1 billion in revenue, leaving little doubt it will soon become the highest-grossing movie of all time. I saw it with my daughters over the holidays, and I cannot recommend it strongly enough!

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

2015 Q4 Market Index Returns

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