market performance

Portfolio Developments, Emerging Themes


This has been an eventful year in the markets, to put it lightly. Unforeseen events have had dramatic effects.

We wrote about some of the themes in our portfolios last fall. Airlines and biopharmaceutical companies both seemed attractive, with valuations at seemingly favorable levels. Needless to say, global pandemics turn out to be as great for biotechs as they are lousy for airline travel.

Our natural resource holdings had similar variation. Turmoil helped the shares of precious metal miners and hurt the shares of industrial metal producers as much of the global economy shut down.

We are keeping the long view in mind. The next energy revolution, driven by solar power and batter storage, will still require higher production of copper and other minerals. The decades-long trend toward higher levels of air traffic will resume. These are our views.

As we review the finances and prospects of our holdings and rebalance where appropriate, another theme has emerged. The shares of some basic kinds of companies, those involved in food and shelter and beverages, have gotten to bargain levels, in our opinion. It seems like it has been a long time since we felt that way, and we are excited to add holdings in these lines.

Last fall we believed that international equity markets had some attraction based on value compared to US holdings. We are more excited now about the emerging bargains we perceive here in the US.

Clients, these are the conclusions our principles and our processes are leading us to. If you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. .

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets..

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

The Melting Pot Matures


A few weeks ago the Nobel Prize Committee announced the latest round of Nobel laureates for 2016. Seven Americans were named to this high honor—and six of the seven were immigrants, born outside of this country.

Immigration is frequently a hot topic during an election year, this one perhaps more than most. On the one side, we are told that immigration is costing us jobs, lowering our wages, and causing more crime. On the other side we are given a moral argument, that we are a nation of immigrants who should welcome others into our melting-pot culture as we have welcomed those who came before.

We set aside the moral side of this debate; while we occasionally dip into moral philosophy, this blog concerns itself chiefly with practical matters of economics. And as a practical matter, there are very good reasons why we should appreciate the value that immigrants bring to our country, above and beyond whatever Nobel prizes they may win.

As a country we are facing a demographic crisis. Since the 1970s, we have been having noticeably fewer children per family than we did previously. As our generation reaches retirement age, record numbers of Americans are leaving the workforce. I still plan on working until I’m 92—but many of my contemporaries have other plans. As we leave, there are more openings left behind than we have children and grandchildren to fill.

This demographic wall creates a major drag on the economy: we want to grow our economy faster, but we simply don’t have enough workers to do it. For the past year we’ve seen the unemployment rate hovering at 5% and below. Even as the economy recovers and we start to add jobs, there’s going to be a very real question as to who will be filling them. The workers simply aren’t there. To some extent this is a regional issue—some of our employment woes could be fixed by having job-seekers move from economically depressed areas to thriving areas where jobs are being created too quickly to fill. But not everyone can uproot their lives for work, and where people cannot or will not relocate, the only alternative is to import workers from elsewhere.

Ours is not the only country facing this demographic crisis. We need only look at Japan, Europe, and other parts of the developed world to see what happens when an aging population is not replaced. Many first world countries have a lower birth rate and lower immigration rate—and, not coincidentally, lower GDP growth. We would do well to learn from their example what not to do.

This is not to say that we endorse open borders or encourage illegal immigration. We are a nation of law. We should have sensible laws that are enforced in a fair and even-handed manner. But to suggest that we should slam the door shut on immigrants is to ignore the economic reality we face. One of the best and surest ways to expand our economy is to add new people to it—and we will need to, if we wish to continue growing at a reasonable rate.

The opinions voiced in this material are for general information only.

Don’t Let Your Anchor Drown You

© Can Stock Photo Inc. / dubassy

When the market has been volatile and seems to be trending lower and account values are shrinking, we frequently look back to the high point, and shiver at the loss since that time. Some clients have told us what their accounts were once worth, and what they are worth now, in order to get across how the losses are affecting them. It is not good fun for anyone. Behavioral economists refer to the first number in those comparisons as the “anchor.”

Since the beginning of 1950, using the historical records of the S&P 500 Stock Index as a proxy for the broad stock market, there have been 16,630 trading days. On just 1,175 of those days was the market trading at a new high—about one day out of 14. On the other 15,455 days, one could have bemoaned the “loss” from the prior peak. In other words, 93% of the time, one could say money had been lost.

But in this same period, the S&P rose from 16 to 1,880! Does it really make sense to say we were losing money 93% of the time, when we ended up with 117 times what we started with? We think the final destination is far more important than the ride we took to get there.

Of course, this time feels different. Mainly because it is here, right now, in our faces. And for some fraction of that 93% of the time, the change from the prior peak was just a little bit. So we went back and figured out what part of the time the market was down more than 10% from its prior peak—in ‘correction’ territory, as the gurus would say.

Surprisingly, the market was in correction territory, down more than 10%, on 6,372 days—right at 38% of the time or about three days out of every eight.1 A lot of misery was endured (or ignored) on the way to that 117-fold gain.

So thinking about the broad market, the S&P 500 Index, it might not be appropriate to anchor to the 16 point reading back in 1950. That was a long time ago, after all. 1960, at 55 points, might also be too far back. The right anchor, depending on your age and length of investment experience, might be the 80 points in 1970, or the 120 point level reached in 1980, 350 points in 1990, or the 1,400 point level from the year 2000. The anchor that could drown you is that last high point—2,130 points in May of 2015.

In Outcomes May Vary we wrote about the consequences of selling out at low points. Usually, those who do so are anchored to the last peak, focusing on paper losses. That is why we are encouraging thoughtfulness is choosing anchors. Write or call if you would like to discuss your situation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.


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2015: Year In Review

© Can Stock Photo Inc. / welcomia

As we think about the year now ending, we would love to say “It was the best of times, it was the worst of times.” That would not be accurate. However, it truly was “the spring of hope, the winter of despair.”

Nobody has ever conveyed the concept of a mixed bag as well as Charles Dickens did in the opening lines of ‘A Tale of Two Cities.’ And nothing is more fitting when we think about 2015 in the investment markets.

The parts of the market that appeared to be cheapest at the start of the year mostly got cheaper, and cheaper, all year long. Meanwhile, interest rates remained at seemingly impossibly low levels—expensive bonds remained expensive all year. Natural resources that had been sliding for years continued to slide.

Back in the real economy, new jobs were created each month. Retail sales and most measures of economic activity moved higher through the year. Inflation remained quiet, and consumers paid astonishingly little for gasoline. The low prices for natural resources and energy fed into low input costs for businesses, which helped business profits remain near record levels.

The kinds of excesses that cause the end of the growth cycle were simply not present in 2015. The ‘irrational exuberance’ of investors that usually accompanies major peaks in the market is also scarce.

Our principles remain unchanged, but we are always seeking to improve our strategies and tactics. Avoiding stampedes, owning the orchard for the fruit crop, and seeking the biggest bargains are always going to make sense. Putting these principles into practice is the hard part. The new year will see a continuation of the increased attention to diversification, the search for new sources of portfolio income, and new ways to think about effective portfolio construction.

We are ready to say goodbye to 2015, a year when the S&P 500 crossed the breakeven line more than twenty times. But we do so with the spirit of “the spring of hope,” given what we know about how things work. Please call us with your questions or comments.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. </p>

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

What Happened to my Account?

© Can Stock Photo Inc. / SergeyKuznecov

2015 has been a difficult year, investment-wise.

Most of us know how this works. We have periods where we laugh and laugh about how much money we’ve made, and other times where we want to cry and cry.

In addition to the ups and downs of the market, our accounts have spells where they behave differently than the broad market averages. Everyone has noticed the divergence this year.

So 2015 reminds us a lot of 1999, when the tech stock boom was in full swing. Midyear, we turned negative on large growth companies. But that was what everyone was buying. We preferred the bargains in “old economy” stocks like railroads and food companies and tractor makers. They went down and down while technology stocks went up and up. We seemed awfully stupid as our favorites ground lower month by month.

Of course, that all changed when the bubble burst. The high fliers ended up declining about 80% over the next two and a half years (the tech-heavy Nasdaq Composite index slid from a high of 5,408 in 2000 to a mere 1,108 in 2002), while the “old economy” stocks staged a good rally. In other words, we turned smart.

In trying to understand the carnage of 2015, one glaring fact stands out. All year long we have held the strong opinion that the best bargains in the market could be found in the natural resource sector. Companies that had anything to do with extracting minerals or oil from the ground started the year at amazingly depressed levels—bargain prices, in our view. Then they became cheaper. Then they became cheaper. Then they became cheaper. We seem awfully stupid, again!

We know how this works. At some point the gluts that have been so painful for many of our holdings will turn into shortages. Higher prices and growing revenues are the likely result. We’ve been through this with other holdings in the past, watching values getting chopped in half before tripling or quadrupling.

What we do takes patience. We never wanted 2015 to require so much of it, to require an explanation of performance divergences. But we believe the tide will turn, as it always seems to. Thank you for your business.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.