With the so called Brexit vote we are once again being told that the future is uncertain and we should worry because ‘this time it’s different’. Whether real or imagined the stock markets will often react based on perceptions. It is then that we hear the refrain “it’s different this time” – it really never is. Events change but markets react for the same reasons. Warren Buffet famously said that the four most dangerous words for investors are: this time it’s different. Viewing an event as different can cause us to liquidate investments, fail to make important decisions or simply stop investing.
The media fights to fill a never ending news cycle and politicians need a crisis to justify their existence and re-election. We are inundated with bad news, some based on fact and some simply hype. The current market dip as a result of the Brexit is typical of the reaction to an unforeseen event. Moreover, we often hear about the negative impact of events but not the subsequent recover. For example CNN had the headline (one June 28th) ‘Brexit Crash wiped out a record $3 trillion. Now what?”. The now what was that in just a week or so after much of the money was back because markets rebounded.
So what can we expect in the coming months? While nobody knows exactly- frankly what markets, and portfolios do in the short term should not matter. We believe that the Brexit, and uncertainty with Europe, may ultimately help the United States as investment moves out of Europe to the U.S. Our labor cost is roughly half of that in Europe, our energy cost is less than half and there are big tax advantages for non-US companies. In the near term, however, we will continue to see volatility and as we have more media there is more media attention.
Markets have prevailed when shaken by crisis in the past and rewarded investors who have the courage and insight to stay invested and when able to add to positions. Although past performance does not guarantee future results, the Dow was at approximately 117 when Pearl Harbor was attacked, fell 20% to 93 by early May 1942 and then rallied to 145 by July 1943. In August 1962, at the time of the Cuban Missile Crisis, the Dow was at 615. It fell to 550 in October and then rose to 650 in December and 767 by December 1963. At the beginning of the 1982 the DOW was at 700 and by 1992 the DOW was at 3100 (source stock charts.com).
Looking more recently consider that in 2013 we had a series of negative events ranging from a government shutdown to war in the middle east. Despite many dips including a 7.5% drop in May the markets climbed by almost 30%. This is typical of what we have experienced over the last 50 years. Long term investors should remember that it’s normal to see pullbacks of 10% or more during bull markets. In fact, we’ve seen the S&P 500 correct by at least 14.7% five times since 2000, only to eventually make its way higher. The short-term interruptions in the markets can present attractive buying opportunities for investors who have a well-diversified plan in place.
Today our economy is still the envy of the world. We have historically low interest rates, low energy cost and little inflation. American companies are more efficient than ever before, are earning record profits and have record amounts of cash. America is the world leader in production and utilization of technology.
These reasons suggest sticking to your long-term financial plan now more than ever. You’re investing for a lifetime – not for a week, a month or even the duration of the fight against terrorism. Unfortunately, what is seen as a positive indicator one day is discounted the next, which can be very confusing. Those constantly conflicting stories may be of interest to day-traders, but not to me and, hopefully, not to you. Instead of listening to the hype, we focus on you and your needs. That’s the information we need to make well-thought-out long-term investment decisions based on your personal vision, needs and goals.
While the internet, newspapers’ business headlines and TV financial talk shows can be entertaining, they often cause us to divert our concentration from our real objectives which may include maintaining our lifestyle, protecting against unnecessary taxation and passing on wealth to our heirs. We need to understand that with increased media there is increased competition for viewers and readers. Media is big business and companies seek to generate profits by attracting viewers. They do this with sensational headlines that often seek to scare us as much as entertain; but which may not truly inform.
Our advice is to generally ignore the media when it comes to news about individual companies’ performance or how events have negative influence on the markets. Hopefully you will not let the headlines upset you as you begin to understand that they are meant to gain viewers, not to advise investors. The Brexit is just another event that we believe is like Y2K, the lowering of the US Credit Rating or Pearl Harbor. The Brexit is new but not different in terms of market behavior.
As always we are here for you. Please contact us with questions, concerns or whenever we can otherwise be of service.
Annual Report 2016
