2021 Q2 Newsletter
We Spartans are goal-focused, plan-driven, lifetime equity investors. As such, we engineer financial plans and portfolios based not on my view of the economy and the markets, but on your most cherished financial goals.
For we know the S&P 500 has appreciated by a factor of 70 over the past 60 years (and its dividends by 30) while the consumer price index is up by only a factor of 9. Historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. Although there are no guarantees, we believe this is more likely than not to continue in the long run, hence our insistence on owning Great Companies of the World as opposed to lending to them, or Heaven forbid, governments.
We believe that acting continuously on a rational plan – as distinctly opposed to reacting to current events – offers us the best chance for long-term investment success. Simply stated, unless our goals change, we see little reason to alter our financial plan.
We do not believe the economy can be consistently forecast, nor markets consistently timed. We are therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent but ultimately temporary declines.
The performance of our equity portfolios relative to arbitrary benchmarks is irrelevant to investment success as we define it. The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals (i.e., your Plan’s Monte Carlo probability of success).
That said, it is clear that the American economy continued its dramatic recovery in the first half of 2021, spurred by (1) the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic, (2) massive monetary and fiscal accommodation, and (3) its own deep fundamental resilience, which ought never to be underestimated. At the same time, it is struggling with supply chain imbalances as well as a historic mismatch between the number of job openings available and continued high (though rapidly declining) unemployment.
We are in the midst of an unprecedented experiment in both fiscal and monetary policy; the outcome remains impossible to forecast. There is also the issue of the Biden administration’s radical tax proposal with respect to capital gains and estates. The best that can be said on this subject is that, as the first half ended, the momentum behind these initiatives seemed to be ebbing. But the political climate remains as inimical to capital (and capitalists) as it has been in a while.
Nonetheless, for investors like us, I think the most important economic report of this whole six-month period came just a few days ago. It was that household net worth in this country spiked 3.8% in the first quarter of 2021 to $136.9 trillion, propelled by broad gains in the equity market and home prices. Even more important, perhaps, is the fact that the ratio of household debt to assets continued to fall and is now back down to about where it was 50 years ago.
The consumer powers the economy, and the consumer has rarely carried more manageable debt levels relative to disposable income and has simply never been holding more cash – than he/she does today. In June, the National Retail Foundation raised its outlook yet again; it now expects retail sales to grow 10.5% to 13.5% (that is $4.44 trillion to $4.56 trillion) year over year. Just this past month, the retail giant Target raised its dividend by a whopping 32%
On February 19, 2020 – the market’s peak just before the pandemic took hold – the S&P 500 closed at 3,386. It then proceeded to decline 34% in 33 days, amid the worst global health crisis in a century. But if you bought the Index at that epic top and were still holding it on June 30 of this year, your total return with reinvested dividends has been close to 28%. I’ve never seen – and do not expect to see again – a more vivid demonstration of Peter Lynch’s dictum that “The real key to making money in stocks is not to get scared out of them.”
I believe I was put on this Earth to get you into a beautifully diversified equity portfolio, then do everything in my power to earn your trust such that you own it throughout your lifetime…and beyond. Thank you for being my Spartans. It is both an honor and a privilege to serve you.
Don Davey
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise
