There’s a saying in aviation, "There are old pilots, and there are bold pilots. But there are no old bold pilots."
It is a saying with which I am intimately familiar. My father was a helicopter pilot in the US Army; he served in the Vietnam War for which he was awarded the Silver Star and Bronze medals. One of the stories my Dad once told me had to do with something his flight instructor said to him when he had just finished flight school at Fort Rucker, Alabama in 1969.
Completing flight school meant that you had accumulated 200+ hours of actual flight time. To put this into perspective, a pilot with only ten total hours of time is, literally, a nervous wreck in the cockpit. With only ten hours, a pilot is ‘dangerous.’ He or she has not acquired the requisite time and experience to safely and effectively operate the craft. For comparison, the pilot with 200 hours of flight time is a beacon of confidence, and feels there isn’t anything they can’t accomplish inside a chopper.
“You are no longer ‘dangerous…’ you are now ‘very dangerous.”
These were the words my Dad’s flight instructor shared with the graduating class. The message was that, however skilled and confident these pilots felt at that point, there still remained an ocean of things they didn’t know.
For me, this quote underscores how crucial it is to learn, execute, and practice the fundamentals of a process. For example, superior athletic ability can carry a player, or a team, a long way in competition. But to win consistently over time, fundamentals are key. The same is for true pilots. Fundamentals provide a foundation for the aviator to rely on, especially in pressured situations. In these scenarios, be it in wartime, or when the aircraft malfunctions, or simply during bad weather or poor visibility, pilots trust their fundamentals to execute on a strategy with clarity and confidence. In these instances, reliance on fundamentals (or not) could mean the difference between life and death. Elite pilots understand this. They are able to perform at extremely high levels precisely because of their mastery of fundamentals. They are able to grow old due to their fundamentals.
The same is true for investors. Mass media, and TV pundits and the investment fad of the moment are all distractions that pull us away from fundamentals that create long term success. Succumbing to emotion during volatile episodes in the markets pulls us away from the fundamentals. Social media and comparison pull us away from the fundamentals.
In this issue of the newsletter, we bring you some insights we have gleaned over the past year, along with a reminder to remain keenly focused on the fundamentals.
Ben
We don’t call it a regular newsletter because it’s not regular, and it’s not even a newsletter. Every now and then, however, it’s important for us to connect with each other through this channel. This is a long-form piece you can read in your own time and on your own terms, hopefully a piece that will make you think. It’s not a soundbite. It’s not a tweet. It’s intended to generate some reaction and reflection. You may even remember why you’re investing in the first place, and specifically why you are investing with Beck Bode, why you are doing it so deliberately differently. Consider this a place where you can get away from the noise, or make sense of the noise, better yet to remind yourself that the noise is just that: noise.
The other day I read a Wall Street Journal article that said “…Morningstar Investment Management forecasts that U.S. stocks will average just 1.3% annual returns over the next decade.” Not a typo: One point three percent. And nowhere does it indicate how Morningstar came up with this number! Reading things like this is irritating to me, because it represents just another baseless prediction that results in people freaking out. In the same paragraph, by the way, the author admits that “Stocks returned 14.7% annually and bonds 3.4% in the 10 years that ended June 30, 2021.” We know that historically the equity markets have averaged a 10 percent annual return. We also know that it’s virtually impossible to make predictions about what will happen in the future based on current economic conditions, and certainly past performance. This is a prime example of a brand name, Morningstar, attempting to use its name recognition in the marketplace to exercise some authority over something that is essentially unknowable.
I don’t know if you remember this, or if you even heard it, but three weeks into the business shutdown in the US, right at the beginning of the pandemic, the former PIMCO chief executive (who is also the former head of the Harvard Endowment) pronounced that this ‘might not be the best time for investors to get back in the market.’ This man, Mohamed El-Erian, is a widely quoted and highly respectable economist with a resume that represents the height of achievement in finance. Yet there’s no other way to put it: he was flat out wrong. I bring him up because he is an example of the countless talking heads that really poison the perspective for the individual investor.
Certainly, there are the doom and gloom journalists and pundits out there that perpetuate the notion that, "This time it's different. This time, the world is coming to an end." But I think even more detrimental to our wellbeing are the devils in sheep's clothing, Ivy League-educated endowment managers, successful financiers, CEOs, hedge fund managers and a bevy of others who make comments like this to perpetuate the idiocy that attempting to time the market is a worthwhile endeavor for individual investors, let alone possible..
The only realistic and certain outcome of all this noise is that it can disrupt investors like you and me from reaching our most important financial goals. But we all know this is irrelevant. It doesn't have to be this way. We have a choice to ignore what we hear or read online.
We can and we do.
Articles like this are all over the place. They remind us to become vigilant about how we read and process information. It never ceases to amaze me how after years of equities compounding at an annual average rate of 10%, resulting in investors’ accounts doubling approximately every seven years, and the US financial markets relentlessly pushing higher, across good times and bad, after all this, nearly every single day, we're subjected to the negative noise of the financial media. Every day we are bombarded with negativity. A big part of our learning as investors is to develop a kind of immunity to this, to not be infiltrated by all this incoming negativity.
We spend a lot of time educating our clients on the biggest threats to their long-term finances, the greatest risks to achieving their most cherished financial objectives. And at the top of that list is the effect of your dollars being worth vastly less in the future than they are today. In other words, the loss of purchasing power because of inflation is a massive threat to your financial future. It’s not this stock or that stock. It’s not a good year versus a bad year. It’s inflation.
But to me, of greater magnitude by far, in terms of the effect it has on your success as an investor is “human nature risk.” By that I mean that we're all pre-programmed to react emotionally. Yes, we are all pre-programmed to self-sabotage our portfolios. Our susceptibility to our own portfolio destruction is at its highest in times of emotional distress brought on perhaps by a down market, and certainly not helped with the endless stream of negative financial journalism.
While we can agree that making financial decisions based upon a short-term view is problematic, I do believe that having some perspective on "what's going on in the world today" can be helpful. Not that it has anything to do with you or me, or any impact on our long-term plan. These are not predictions; these are simply the things we notice as we take a mental (financial) inventory of the year to date.
Halfway through 2021, the US economy continues its dramatic recovery, which it began since the midpoint of 2020. In the first two quarters of the year, we saw the continuing positive effects of the vaccine against the virus. There was a big retreat in the numbers of people hospitalized and dying from the illness during that time. We saw massive monetary stimulus from the government, and we observed significant resilience in the economy, which I think is a good lesson to remember – not to underestimate the strength of the US economy.
The S&P500 index ended the first half of the year healthily in the positive. Coming into the year, the consensus earnings estimates (meaning collectively of all the companies in the index) was somewhere around $165 per share. As I write this today, we're in the midst of earning season where we are witnessing a great majority of companies outperforming their estimates and future estimates are being raised. Consensus is that we will reach $200 per share on the S&P in terms of earnings estimates, but that's today, who knows what it will be at year end?
The economy still struggles to deal with imbalances in the supply chain. You may have experienced this in your own life, as have we. The lease on my wife's car was up back in May, but as of the date of this writing, we've been unable to get that same car because of the significant reduction in inventory. The disruption in the supply chain has resulted in a three to six-month delay in getting a new car. It’s not just cars, it’s everywhere as you probably have noticed yourself.
Unemployment remains high (though it’s declining). At the same time there are many job openings. It points to a mismatch. We are hearing a lot of debate between the talking heads and financial journalists as they speculate on when this mismatch will be cleared up. Our view as long-term investors is that it really hasn't anything to do with “when.” We don't really care about “when.” We care only of the fact that it will be cleared up over time.
There's the possibility that inflation is an issue given everything the Fed has done to get the economy moving again. As the first half of the year ended, the Fed indicated that they were aware of this risk. They said they're ready to act against it, and the general feeling was that the inflation we're experiencing today is more transitory in nature, a short-term phenomenon. Regardless, what we're seeing today is that assets that are traditionally thought of as inflation hedges have sold off. This indicates confidence in how the Fed is seeing and talking about inflation.
Throughout the year, we started to see a lot of the Biden administration’s talk about significantly raising capital gains and estate tax subside, but we are at a point where the eventual outcome is still a relative unknown. As long-term investors, short-term decisions like this are of little consequence to us.
From a foundational or economic perspective, the financial health of the consumer is of great importance. A couple of statistics in the first half of the year pointed to household net worth accelerating by about four percent. More importantly, ratio of household debt to assets has fallen to levels it was around 50 years ago. The takeaway is that the American consumer has never had more manageable debt levels relative to their own asset levels as they have today.
Since there is so much noise in the environment, we are reminding ourselves of fundamentals. What better way to do so than to share the fundamentals by which we live at Beck Bode.
The general philosophy of the Beck Bode Strategies, our principles, our philosophy on investing acknowledges that the future is unknown and unknowable. The markets are an uncontrollable ocean, where it's vital to follow the rules, abide by a code if you will, which won’t prevent the bumps and bruises along the way, but which will help us get to our destination in one piece.
What follows is a list of the fundamentals (we like to think of them as “core truths” we live by at Beck Bode. These fundamentals form our backbone, and they help provide us with the strength to keep you on your boat as you pursue your destination.
Your portfolio needs to power a plan. Your plan needs to power a purpose. Why are you investing in the first place?
The loss of purchasing power is the single most detrimental threat to your long-term financial health.
Historical information doesn't matter. We never look at past information to make decisions about how we invest.
Consistent forecasting of the markets or the economy in the short term is impossible.
Investment professionals who profess to know where the markets are headed are engaging in criminal behavior.
If you don’t know when you’re going to sell something don’t buy it in the first place.
If fixed income is part of a long-term strategy, you're doomed.
Investing in bonds is one of the riskiest things you can do in a long term portfolio.
The ideal portfolio contains fewer holdings than you might think.
Proper diversification is achieved not by adding all the asset classes into a portfolio, but through concentration.
Long-term performance is directly correlated to the quality of information that you have at your fingertips and the ability and the expertise to use that information properly. Expertise is important because just because you have access to something doesn't mean that you can make it work.
It takes strength to go against the grain.
To achieve superior outcomes, you’ll need to do something very different from the majority
Pay attention to only one performance benchmark.
The only benchmark that matters is the one that indicates whether you are on track to achieve your financial goals.
That’s it for this time.
In closing, I wanted to say that you and I are long-term, goal-focused, planning-driven investors. We know that the best course for us is to first formulate a financial plan and then to build a portfolio that’s not based on a particular view of the economy or the current markets, but rather on our most important financial goals.
If we can ignore all the short-term prognostications and the pundits and the ridiculous statements made by people, many of whom unfortunately are regarded as the top financial experts in the world, then we may be able to harvest the full premium of what the markets produce over the long-term.
As always, thank you for the trust and responsibility you afford us.
Sincerely,
Ben Beck
Benjamin Beck, CFP®
Managing Partner | Chief Investment Officer