2020 Q3 Newsletter“Those who do not remember the past are condemned to repeat it.” —George Santayana
The coronavirus is still very much with us, as is much of the economic dislocation occasioned by the resulting lockdowns. Granted, we are evidently closing in rapidly on a vaccine—indeed, several vaccines. But it may be quite some time yet before most of us are actually vaccinated, and frustration may abound in the interim. Moreover, in the coming weeks, we all must endure the final phase of a hyperpartisan presidential election cycle fraught with a variety of polarizing issues.
So before we are further engulfed by these additional unknowns, I want to take a moment to review what we as investors have learned—or, if I’ve done my job properly, relearned—since the onset of the great market panic that began in February/March, then ended when the S&P 500 Index regained its pre-crisis highs in mid-August. The lessons, it seems to me, are the following:
No amount of study, economic commentary, or market forecasting ever prepares us for really dramatic events, which always seem to come at us out of deep left field. Thus, trying to make investment strategy out of “expert” prognostications—much less financial journalism—always sets investors up to fail. Instead, having a Lifetime Financial Plan—and adhering to that Plan through all the fears and fads of an investing lifetime—tends to keep us on the straight and narrow and helps us avoid sudden emotional decisions.
The equity market declined by 34% in 33 days this year. And although none of us had ever seen that swift a decline before, its depth was almost exactly average. That is, the S&P 500 has declined by about a third on average once every five years or so since the end of World War II. Yet during those 75 years, the S&P 500 has risen from about 15 to almost 3400. The clear lesson is that, at least historically, the declines have not lasted, but the undeniable long-term upward trend has always reasserted itself.
Almost as suddenly as the market crashed, it completely recovered, eclipsing its February 19 all-time high by August 18. Note that the news concerning the virus and the economy continued to be dreadful, even as the market roared all the way back, and then some. This aligns with history in that (1) the speed and trajectory of a major market recovery very often mirrors the violence and depth of the preceding decline; (2) the equity market most often resumes its advance, and may even go into new high ground, long before the economic picture clears; and (3) investors who wait to invest before seeing unambiguously favorable economic trends will likely miss a very significant part of the market advance. So the overarching lesson of this year’s swift decline and rapid recovery is, of course, that the market cannot be timed, and that life-long, goal-focused equity investors are always best advised to simply ride things out.
These are the core investment principles you and I have been following since the onset of our relationship, and if anything, our experience in 2020 has validated our approach even further.
With that as a pretext, how will we approach the fourth quarter of the year? Simply stated: it would be foolish to exit the quality equity investments we have been accumulating to fund your family’s most cherished lifetime goals because of uncertainties surrounding the lingering coronavirus and/or the election. Aside from the self-inflicted wound of incurring capital gains taxes, our chances of getting out and then back in advantageously are historically very poor, and I have neither the ability nor desire to make any attempt. As I have insisted in each and every year since DEM’s inception in 1998, we Spartans will remain fully invested in our beautiful, low-cost, tax-efficient, globally diversified portfolios with exposure to over 13,000 of the World’s Best Companies, and rigidly adhere to our disciplined rebalancing process.
As always, we are available to discuss any or all of these issues with you via phone, email, Zoom, or in person. After all, that is our job. In the meantime, thank you as always for being our clients. It is truly a privilege to serve as your family’s trusted advisor.
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise