Back to Quarterly Letters || Previous Letter || Next Letter will appear July, 2019
Quarterly Letter to Clients
Indices at quarter-end (March 31, 2019):
Dow Jones Industrials: 25,928.68 1Q'19 +11.15% YTD +11.15%
Standard & Poor's 500: 2,834.40 1Q'19 +13.07% YTD +13.07%
The quarter that just ended was a robust one, with stocks showing double-digit gains. Bonds held their ground, as the Fed led us to believe that there will be no more rate increases in the immediate offing. Growth seems to be slowing, but not yet reversing, and stock prices are hovering around a moderate level of 16-17 times earnings.
I number myself among the many people who are surprised that inflation has been so calm for so long (seemingly in spite of government actions). Inflation is the great enemy of bondholders, and in theory, should help stocks over a longer run. Rising rates, of course, are the other big enemy of bondholders; they are also a factor that should weigh on stocks, at least in the short run.
Given the larger picture, it is my expectation that rates will go up for several decades and my strategy of short-to-intermediate maturities remains the correct position in the bond arena. Stocks may be tempered, but should still return more than bonds over the coming decades. As for the balance of the year, who knows? All we can ever do is position ourselves according to our best evaluation, and hold on through the inevitable ups and downs of the market.
Stocks protect against inflation, and bonds protect against stocks. Or at least that is the theory.
While it may not be perfect, it is the best theory that we have, and so we are left to balance the two asset classes to reach a point where we can sleep soundly at night. As always, fear versus greed.
It is interesting to sit in my seat, when one client tells me that he is afraid of the (stock) market and another tells me that things are looking very bright and he feels the market is relatively cheap. Sometimes in the same day. This shows how much personality enters into the investing process.
Thinking of personality and psychology as it relates to investing brings to mind the Parable of the Talents, something that I have discussed with a friend whom I chide for being too cautious in his investing. The Parable of the Talents refers to a New Testament story of a master who departs on a long journey. He leaves his three servants with sums of money according to his judgment of each man’s ability. (A “talent” was a weight of silver, and the approximate value of twenty years labor, thus a significant amount.)
The first servant was given 5 talents, the second was given 2, and the third 1.
When the master returned from his journey he asked each man for an accounting. The first servant had invested and earned a handsome return; the second invested more cautiously, but still made a decent return. The third servant, fearful of loss, had merely buried the money, and returned it to his master with no increase.
The master rewarded the first two with a portion of their earnings, but when it came to the third servant, he was angry that the servant had not, at least, deposited the money with the bankers and earned some interest.
There are variants of this story, and I have paraphrased. Also, there are many biblical interpretations of the story, but religious discussion is not my point here. My point is that each of us approaches investing from our own personal, psychological viewpoint. We all want to be able to sleep soundly at night. At the same time, we all want to do as well as possible (within our personal parameters). This dichotomy has been a part of the human makeup forever.
Thus, we each must find our personal balance between growth and safety. We seek to increase our wealth while keeping in mind the preservation of our capital. Always against a backdrop of the constant of inflation. As we advance in years, and our ability to accumulate wealth diminishes, it becomes more important to protect against loss. In the end, the only person we answer to, the only one we must satisfy, is ourselves.
There is no right or wrong balance between stocks and bonds; it is a personal decision. I will tell you that among my clientele, the division, in general, ranges from 40%-60% either way, but I also have clients that are 100% in stocks and others that are 100% in bonds. It is a personal choice.
So if you are young and aggressive, by all means, invest like the first servant, for the maximum return; if you are older and more established, invest like the second servant, more conservatively; but no one wants to be like the third servant.
We cannot know what balance will be best, or what strategy will produce the greatest return. What we can do is make sure that our decisions won’t keep us awake at night.
copyright © 2019 JPIC