I’m sorry that my letter happens to be delayed this quarter. While finishing a first draft, the stock market reminded us all of its unpredictability and potential for sudden course corrections. Instead of sending this letter out in its original and dated form, we felt it obviously imperative to address the current market correction. At the same time, last year was such an uncommon year in the capital markets that I decided to retain much of the original letter’s content for your edification. Despite the understanding that market corrections may occur at anytime and for unpredictable reasons, they can still be unnerving. When market volatility increases it is important to remain disciplined and stick to your long-term investment strategy. Thank you for your continued interest in these periodic letters. The intent is to provide you with our interpretation of the current capital markets in the context of investing for the long-term and to regularly communicate our investment philosophy in managing your wealth.
Investing is and has always been a balancing act of contradictions. President Harry Truman complained that he wanted someone to “give me a one-handed economist. All my economists say, ‘on the one hand…on the other’”. In today’s environment, we have elevated asset values in nearly all types of assets on one hand. But on the other hand, we have loose global monetary policy. Likewise, we have historically low levels of asset price volatility on one hand. But on the other hand, we have a geopolitical landscape that is disruptive and uncertain. So what can we do to weigh these factors and arrive at a decision on how to invest our assets?
The first three months of the year have proven to be very agreeable for investors, perpetuating the antithesis of Murphy’s law. If you recall, Murphy’s law states that “anything that can go wrong, will go wrong”. The adage has always struck me as a sort of seasoned pessimist’s guideline for properly setting expectations. Don’t get your hopes up and you’ll find that disappointment comes infrequently. The present state of the markets has us considering what happens to markets when everyone seems to be assuming that Murphy’s law will be enacted by executive order at any moment.
Gender equality in the workforce is not a new topic, but one that requires persistent discussion and influence in an effort to close the gap that stubbornly remains. Much of the focus is on compensation differences as well as the lack of equal opportunity in leadership positions. The social aspect can overtake the resulting dilemma that women face in retirement. In a report published last year1, TIAA outlined the many challenges women face in retirement as a result of earning less, working less, taking less investment risk, and living longer.
Everybody loves an underdog, right? In August, 2015, before the season began, the Leicester City Football Club in England faced seemingly insurmountable odds to win the Premier League title. Odds-makers chanced the club’s prospects for the title at an astonishing 5,000-to-1. To give you an idea of how ridiculously absurd those odds are here are some other odds that lend perspective. The U.S. Men’s Hockey Team was given 1,000-to-1 odds of winning the gold medal in the 1980 Olympics. The Minnesota Twins faced 500-to-1 odds of winning the World Series in 1987. The Cleveland Browns were given 200-to-1 odds of winning the Super Bowl this season (they finished the season with one win)1.
With considerably less animosity or entertainment value, there is another major debate raging at the moment that doesn’t involve our choices for the next U.S. president. It is one that is perennial, has been analyzed exhaustively by scholars and has staunch advocates at opposite sides of the debate. The conflicting wisdom of Warren Buffett illustrates why investors can’t seem to make a clear determination on whether passive or active investing is the superior methodology.
Only one thing is certain as we approach the U.S. presidential election in early November, the Twins won’t be world champions this season. Well, maybe there’s one more thing, in January the Obamas will need to turn in their keys to the White House. Occasionally we get asked about how the presidential cycle affects the stock market or whether there’s a trend to market performance around an election. Along with many other theories and spurious happenstances, an unhealthy amount of time and resources has gone into such analysis in that eternal quest to take advantage of the stock market and strike it rich. Some of my personal favorites are that an AFC team winning the Super Bowl predicts bad stock market returns, an American-born model gracing the cover of the Sports Illustrated swimsuit issue predicts big market gains and rainfall totals in New York City are positively correlated to the stock market.