Wonderful Challenges

To our readers, and especially our wonderful clients:

All of us at Farr, Miller & Washington wish you and your families a very happy and healthy holiday season.  Each time this year I find myself counting my blessings for the opportunity you have given us to do a job that we truly love to do.  It just doesn’t seem like work to help so many good people and institutions work toward their financial goals.  Please know that we are very grateful, and we don’t take your support for granted.

The S&P 500 is up over 10% for the year, the economy is positive and growing, and US household wealth has gained over $33 trillion since the lows of 2008 and 2009.  Conditions in the US are generally peaceful, and ours remains the greatest country in the world. We have so much and are so grateful.

As we (I and my FMW collaborators) write our weekly commentary we strive to strike a balanced, apolitical tone that focuses on economic issues and the investment environment.  The actions taken by the Federal Reserve, the President, Congress, and even at times the Supreme Court, have serious implications for investors.  The past eight years have shown the crucial roles of the Dodd-Frank Act, Quantitative Easing, and Chairman of the Federal Reserve Bernanke’s emergency trips to the White House and Capitol Hill, to name just a few.  Each week, against every polite mother’s advice, we discuss money and politics and how they may affect portfolios and clients. Mom was so relieved that I didn’t have to write about sex and religion, but she didn’t find this very genteel either.  Feedback from last week’s Market Commentary suggests we strayed from our apolitical mission.  I apologize. We never ever want to cause offense, and we will continue to try to “take the middle view.”

Throughout the long presidential campaigns leading up to the November 8th election, we strove to carefully sidestep some of the sensitive political issues that this election has brought to the surface.  We have also been very careful not to appear partisan in any way.  We did this knowing that the election’s outcome could have some very real implications for the investment landscape in 2017 and beyond.  Now that the election has been decided and a new president will soon take office, we face a new legislative course that will have serious implications for the economy and markets.

Investing is first and foremost the management of risk.  The first goal of every investor should be to not lose money.  For many years now, we have been sending out weekly Market Commentary that discuss different aspects of the investment landscape that may not be receiving the investor attention we feel they should.  After eight years of a remarkable bull market, the pain suffered at the 2009 lows has dulled and is remembered like a some-years-ago bout of stomach flu.  In recent years, the topics we have covered, more often than not, are related to investment risks that we feel investors are not fully appreciating.   If it seems like we are overly cautious or negative, it’s because we are entering our 8th year of a bull market which has seen the S&P 500 rise roughly 235% since the March, 2009 lows.  Stock prices and valuations simply don’t have the margin for error that they did five years ago.  When we see opportunities, like the attractive valuations for banks that we wrote about earlier in the year, we try to bring you that “glass-is-half-full” perspective as well.

Though making record highs, stock prices may go a good deal higher.  They may also be on the brink of a correction.  Our charge is to build portfolios that can simultaneously enjoy up market and endure declines.  We strive to limit risk and always take the long-term view.  Our other consistent message to investors has been that NOBODY can time the markets with any degree of precision.

We counsel our clients to remain fully invested, even when valuations appear somewhat rich.  We say this because history has shown that valuations can become much, much richer over time before they normalize.  Moreover, numerous studies have shown that missing just a few of the best-performing days over long periods of time can have highly deleterious effects on long-term investment returns.  Therefore, while we write about risks and opportunities on a weekly basis, we are typically not making dramatic portfolio changes week to week.  We are constantly evaluating our positions and their valuations – on both relative and absolute bases.  We buy and sell very deliberately and with dogged discipline.  Ours is an emotional business, and emotion is the foe.  We are buy-to-hold investors, and we simply feel that the best policy is to be aware of all the risks, opportunities and especially valuations when engaging in the investment process.  Rose colored glasses can be costly.

Thank you for giving us the greatest jobs we could imagine, for your ongoing support and wonderful friendship.  Have a great holiday, and let us know if we can help in any way.