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JAN 16, 2023

What we believe

BY KEITH THOMSON

If you are a client reading this, I trust you are a long-term, goal-focused, plan-driven equity investor. We believe that lifetime investment success comes from acting continuously on our plan. Likewise, we also believe substandard returns, and even lifetime investment failure, come from reacting to current events. The unforeseen and indeed unforeseeable economic, market, political and geopolitical chaos of the three years since the onset of the pandemic demonstrates conclusively that the economy can never be consistently forecast nor the market consistently timed. Therefore we continue to believe that the most reliable way to capture the full return of equities is to ride out their frequent, but historically always temporary, declines. These will always be the bedrock convictions that inform our investment policy, as we pursue your most important financial goals together.

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Unrelieved chaos continued in 2022. The major drama of the year—and, it seems likely, of the coming year—were the central bank’s belated but very aggressive efforts to bring inflation under control. After rising seven times in the nearly 13 years between the trough of the Global Financial Crisis (March 9, 2009) and January 3, 2022 the U.S. equity market sold off sharply; at its most recent trough in October, the S&P 500 was down 27%. (Bond prices also swooned in response to sharply higher interest rates.)
 
It seems to me more than a little ironic that, after the serial nightmares through which it's suffered since the onset of the pandemic early in 2020, the mainstream equity market managed to close out 2022 somewhat higher than it was at the end of 2019 (3,840 versus 3,231 for a gain of 19%). Not great, but not at all bad for three years during which our entire economic, financial, political and geopolitical world blew up. If anything, this tends to validate our core investment strategy over these three years, which—simply stated—has been: stand fast, tune out the noise and continue to work your long-term plan. Needless to say, that continues to be my recommendation, and in the strongest possible terms.
 
The burning question of the hour seems to be whether and to what extent the U.S. Fed and the Bank of Canada in its inflation-fighting zeal, might tip the economy into recession at some point—if it hasn't already done so. Over the coming year, the way this plays out may determine the near-term trend of equity prices. My position continues to be that this outcome is quite simply unknowable, and that one cannot make rational investment policy out of an unknowable. That said, I continue to believe strongly that whatever it takes to put out the inflationary fire will be well worth it. Inflation is a cancer that affects everyone in our society; if recession proves to be the painful chemotherapy required to destroy that cancer … then so be it.
 
Although this may be hard to remember every time the market gyrates (and financial journalism shrieks) over some meaningless monthly economic datum or other, you and I are not investing in the macroeconomy. Our portfolios largely consist of the ownership of enduringly successful companies—businesses that are even now refining their strategies opportunistically to meet the needs and wants of an eight billion person world. I like what we own. As I always say—but can never say enough—thank you for being my clients. It is a genuine privilege to serve you.

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Recessions and bear markets are very easy to predict, except for the timing, cause, magnitude, duration, location, and policy response.

Morgan Housel

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