2016 Q2 Newsletter
Are We in Only the Second Inning?
In a world of 24/7 real-time media coverage of every major global event, investors are typically advised to abandon long-term investment strategies during times of uncertainty … at least until things “settle down.” After all, what sensible investor would have wanted to own equities during the first half of 2016 amidst the backdrop of an economic slowdown in China, the upcoming presidential election, vicious terrorist attacks both home and abroad, and the latest Armageddon du jour, Brexit? But despite the many dire predictions of The End of the World as We Know It, investors like us who blissfully ignored the headlines have been rewarded with modest gains in our portfolios thus far in 2016. A recent DALBAR study quantifies the huge price undisciplined investors pay for deviating from a sensible buy-and-hold investment strategy. Analyzing aggregate investor account balances, DALBAR calculates that while the S&P 500 index returned 10.35% annually during the thirty-year period ending December 2015, the average equity investor achieved a real-life return of only 3.66%. It turns out the very strategies investors are encouraged to employ during times of uncertainty to avoid temporary fluctuations actually cause them to miss out on the bulk of the permanent gains that are simply there for the taking.
At DEM, we believe our clients are entitled to 100% of the equity market's return over the course of their investing lifetimes. One of the ways we do this is to always help you see the forest through the trees, especially during times of uncertainty and volatility. And I cannot think of a better way to do that than to offer the following perspective on the past century:
Setting classic definitions of bull and bear markets aside, one can make the case that US equities have experienced just three megabull markets followed by three megabear markets, the last of which being the period from 2000 - 2009. Viewed from this perspective, it is difficult not to notice that multi-year extremes in one direction have historically been followed by multi-year extremes in the opposite direction. Might it be that the recent wave of innovation and entrepreneurship in industries such as nanotechnology, clean energy, big data, and the sharing economy are planting the seeds of the next multi-decade advance? Might not Britain’s exit from the socialist grasp of the European Union free the world’s third-largest economy (and perhaps even the rest of Europe) to innovate and expand, ultimately benefiting not only the UK but all of its global trading partners? Might we be in only the second inning of the next megabull market that may still have much, much further to run?
Make no mistake; this is not meant to be a prediction in any way, shape or form; only one person's optimistic interpretation of historical data. But whether these megatrends continue to play out or not, the only sensible strategy is to steadfastly cling to our portfolios of the World's Best Companies, especially during times of uncertainty.
I would like to conclude by offering my heartfelt appreciation to all who participated in our first ever DEM client survey. From inception, our goal has been to provide you with the peace of mind that comes from sound planning, a time-tested investment philosophy, and a highly personalized level of service. Your feedback will help us do all of that even better. And I say without exaggeration that reading your hand-written comments was the single proudest moment of my professional career. Thank you!
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise