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2017 Q3 Newsletter

Weathering the Storm

With the estimated energy equivalent of 10,000 nuclear weapons, hurricanes are one of Mother Nature’s fiercest beasts. Since 1953, the World Meteorological Organization has been naming hurricanes originating in the Atlantic Ocean using six separate alphabetical lists of male and female first names. Every six years, the names are recycled, except for those associated with the deadliest/costliest hurricanes. Those names (think Charley, Andrew, and Katrina) are forever retired, presumably to avoid awakening the ghosts of those monsters. Many of us witnessed the incredible destructive power of these storms firsthand last quarter as hurricanes Harvey and Irma caused hundreds of deaths and inflicted property damage and flooding upon millions in Texas, Florida, and the Caribbean.

Located approximately 100 yards from the Atlantic Ocean in Neptune Beach, DEM headquarters (as well as our servers, computers, and files) live under constant threat of obliteration via hurricane. If that happened, we would still need the ability to service our clients, transfer funds, execute trades, and resume normal day-to-day operations. Therefore, we have worked with a team of consultants over the years to design a comprehensive Disaster Recovery Plan. This Plan outlines exactly what every person in our organization is to do, where everyone is to go, and exactly how we will return to doing business after any significant interruption. To achieve that goal, we have invested in technologies such as cloud-based solutions, off-site data storage, virtual networks, and a voice over IP phone system to ensure that DEM will always be able to get up and running quickly after a disaster.

A few weeks ago as I was directing our team through our Disaster Recovery Plan in preparation for a direct hit by Irma, I was struck by the similarities between hurricanes and bear markets:

  • Both are inevitable. Just as dozens of tropical depressions have morphed into hurricanes over the years, equities have experienced dozens of bear markets. It would be foolish to simply hope that neither ever returns.
  • Both are unpredictable. Even the world’s most sophisticated computer models cannot accurately predict the timing, length, duration, or path of either a hurricane or a bear market.
  • We worked with an independent insurance agent to save one client over $6,000 per year in annual premiums by consolidating his home/auto with a single carrier, increasing his deductibles, and covering his excess liability using a low-cost umbrella policy.
  • Both are powerful. Hurricanes Charley, Andrew, and Katrina each killed hundreds of people and caused hundreds of billions of dollars in property damage. Similarly, the bear markets of 1973-74, 2000, and 2008-09 decimated equities by more than 50 percent.
  • Both are temporary. Just as every single hurricane has eventually dissipated and given way to sunny skies, properly diversified equity portfolios have recovered from every bear market and gone on to establish new record highs.
  • The key to surviving either one lies in proper planning and rigidly adhering to the Plan.

As it was with Irma, I have complete confidence that DEM will emerge from the next hurricane completely unscathed, because we have taken the time to craft a well-designed Disaster Recovery Plan. I am equally confident that our well-designed Lifetime Financial Plans will ensure that each of you will emerge from the next bear market unscathed. When — not if — the next market downturn rears its ugly head, we will not panic and we will not sell. Rather, those of us still in the accumulation phase will continue purchasing additional shares at temporarily depressed prices. We will fund our retirees’ distributions from our Bear Market Reserves rather than from equities. We will rebalance our low-cost, tax-efficient, globally diversified portfolios of the World’s Great Companies back in line with our target weightings. In short, we will rigidly adhere to the well-crafted Plans we have worked so hard to design, refine, and implement for you. Rather than fearing the next bear market, our sincere hope is that each of you feels confident and empowered to weather the next inevitable storm.

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

2017 Q3 Market Index Returns

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