January 4, 2021
One of my favorite quotes as it relates to the stock market and life in general comes from former Secretary of Defense Donald Rumsfeld-
“Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns- the ones we don't know we don't know.”
Once in a very great while, there comes a year in the economy and the markets that may serve as a tutorial—in effect, a master class in the principles of successful long-term, goal-focused investing. 2020 was just such a year. On December 31, 2019, the S&P 500 index closed at 3,230.78. This past New Year's Eve, it closed at 3,756.07, some 16.3% higher. With reinvested dividends, the total return of the S&P 500 was about 18.4%!
From these bare facts, you might conclude that the equity markets had quite a good year. As indeed it did. What should be so phenomenally instructive to the long-term investor is how it got there. What we did not know at the start of the year was that the longest running bull market in history would end from an “unknown unknown”, the COVID-19 pandemic. From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly 34% in five weeks.The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August.
The lifetime lesson here: At their most dramatic turning points, the economy cannot be forecast, and the market cannot be timed. Instead, having a long-term plan and sticking to it—acting as opposed to reacting, which is my investment policy in a nutshell—once again demonstrated its enduring value. Two corollary lessons are worth noting in this regard. (1) The velocity and trajectory of the equity market recovery essentially mirrored the violence of the February/March decline. (2) Both outcomes were consistent with historical norms. “Waiting for the pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance and is often the case with most major market declines.
The American economy—and its leading companies—continued to demonstrate their fundamental resilience through the balance of the year, with all three major stock indexes making multiple new highs. Even cash dividends appear on track to exceed those paid in 2019, which was the previous record year. Meanwhile, two vaccines were developed and approved in record time and were going into distribution as the year ended. There seems to be good hope that the most vulnerable segments of the population could get these vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of this year, if not sooner.
The second great lifetime investing lesson of this hugely educational year had to do with the presidential election cycle. To say that it was the most hyper-partisan in living memory would not adequately express it: many supporters of both candidates were genuinely convinced that the opposing candidate would, if elected/reelected, precipitate the end of American democracy. Unfortunately, everyone who exited the market in anticipation of the election got thoroughly (and almost immediately) skunked. The enduring historical lesson: never get your politics mixed up with your investment policy.
Still, as we look ahead to 2021 there remains far more than enough uncertainty to go around. Is it possible that the economic recovery—and that of corporate earnings—have been largely discounted in soaring stock prices, particularly those of the largest growth companies? If so, might the coming year be a lackluster or even a somewhat declining year for the equity market even as earnings surge? Yes, of course it's possible. Now, how do you and I—as long-term, goal-focused investors—make investment policy out of that possibility? My answer: we don't, simply because one can't. Our strategy as 2021 dawns is entirely driven by the same steadfast principles as it was a year ago—and will be a year from now. We therefore tune out “volatility.” We act; we do not react. This was the most effective approach to the ups and downs of 2020. I believe it always will be the only approach.
I’d like to end this letter on a personal note. 2020 was by far the most eventful year of my life, both personally and professionally, when it came to the topic of this very letter. Right as “Coronavirus” was becoming a part of our everyday vernacular in February, one of my most trusted colleagues and mentors passed away unexpectedly. Our own mortality is the very definition of “known unknown”. Many of you reading are this letter because of this tragic event and I thank you for letting me become a part of your lives over the last year.
Another “known unknown” fact of life when you live on the Gulf Coast are hurricanes, or as one of my long-time family friends refers to them- “tropical occurrences”. He refuses to utter what he refers to as the “H” word! The last time a major Hurricane made a direct landfall on Coastal Alabama was Hurricane Ivan in 2004. Since that time, this area has had unprecedented population growth and with it an entire generation of residents who did not know what to expect with the inevitable landfall came to pass. Well, I believe we’ve all been educated (or re-educated) on the power and ferocity of mother nature. Luckily, while the physical toll to property was enormous ($6.25 Billion in damage) the human toll was thankfully quite low as only 8 deaths were recorded even though no evacuation orders were given for either Mobile or Baldwin counties.
Once again, I sincerely thank you for being my clients. It is a privilege to serve each and every one of you, and I look forward to helping you and your families navigate all the known knowns, known unknowns, and unknown unknowns for many years to come!
P.S.- Here are a few pictures my wife created showing a before/after view of my family’s pier in Orange Beach along with one of myself and my “helper” cleaning up the mess Sally left for us. If you look closely, you’ll also see my 6-year-old future gymnast practicing her cartwheels. This home has been in our family since 1984 and has seen its fair share of storms over the years!
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