We Have A Lot To Be Thankful For
November 30, 2020
My son had his first birthday a few weeks ago and its been an interesting year to put it mildly. The worst pandemic the world has seen in a few generations has restricted just about everything we have known to be "normal." It was an election year with a politically divided nation that led to constant bickering, protests and occasional outbursts of violence. Unemployment is high, small businesses are struggling and we have a soaring national debt. Happy birthday Charlie, you've inherited quite a mess.
And yet I think we have so much to be thankful for. There is no better place or time to be born than America in 2020. The pandemic has pulled forward 5-10 years of technological progress out of necessity. The winner in the election was moderation as voters pushed to the center. We now have several viable vaccine candidates that offer hope the end is in sight for COVID-19. I have written before that it is not wise to bet against America, our best days remain ahead of us. The market also agrees with this view and is up 11.7% in a year with no shortage of reasons to be negative.
When analyzing investment opportunities, I think about what my children's future will look like and how a company will evolve to meet their needs. The pace of technological advancement is staggering and it seems to be accelerating. Here are a few recent thoughts I have had while analyzing new convertible bond issues.
- In the past 20 years we went from the bank teller to the ATM to having PayPal, Square, and Venmo. Will my kids ever need a traditional bank?
- Horsepower and fuel efficiency no longer sell vehicles its now about silicon and software. As sensors and safety features improve will my kids learn how to drive a car?
- Information is so plentiful the only scarcity is human attention. I have no idea what their future career will be and it likely hasn't been invented. I do know that the opportunity to learn anything will get easier allowing them to train and adapt quickly to the economy's demands.
What is going on with the market?
A month ago I wrote that the future return prospects for the market were bleak. The month of November then went on to be one of the best in market history. For Thanksgiving I was served a slice of humble pie as a reminder that markets do not always function as expected. I have advised caution since the beginning of summer as there were a wide variety of scenarios that could play out with the pandemic, election and trade war. It was my view that stock and bond valuations were reflecting optimistic outcomes for these issues and the risk/reward was not favorable. The market only cares about one thing - profits and in the past few weeks risks to the economy have been reduced. The election outcome likely means the corporate tax rate will not be increased, data from the vaccine candidates puts an end the pandemic in sight and there is renewed optimism the new administration will have less adversarial relationship with China. The outcome to key macroeconomic drivers (taxes, trade, public health) appears to be favorable and stock and bond prices adjusted upward accordingly.
This underscores the importance of having a plan for your investments and the need to always remain invested. I believe in rebalancing in response to the market rather than on an annual or semi-annual basis. By rebalancing in March and increasing equities, we were able to buy low and shifting back over the summer to the desired stock/bond mix we have been selling high. The timing of these moves will never be perfect, but it has still produced a favorable outcome. The great trader Jim Rogers once said "Buying low and selling high is simple advice, the problem is knowing what is low and what is high."
Reminder to stay the course, keep it simple and don't complicate the process
With investing you don't have to do exceptional things to get exceptional results. I believe the following process is likely to produce satisfactory results over a long period of time by minimizing mistakes.
- Buy great businesses at reasonable prices. Stock valuations relative to interest rates remain the most attractive option
- If you do not know how to identify a great business or a reasonable valuation, buy the VOO (Vanguard S&P 500). Owning a piece of corporate America at low-costs will do well over the long run.
- Do not attempt to time the market
- Avoid active trading - Don’t let emotions drive decisions
- Have a clearly defined plan and stick to it. If you don't have one I can help you.
- Avoid asset classes that diminish returns - i.e. cash and gold
- Keep expenses to a minimum
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market result is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
