To Our Business Partners

• THE THING ABOUT BEAR MARKETS. 

  In last month’s semiannual newsletter, we included a quote from the legendary investor, Shelby Davis, stating, “You make most of your money in a bear market, you just don’t realize it at the time.”  We thought we’d put that to the test by examining periods where there were significant market declines and subsequent returns.

Looking back at the most popular and widely-owned index – S&P 500 – there have been three significant bear markets in the last fifty years or so:  1973-74, 2000-02, and 2007-09. (While the S&P 500 also experienced a significant decline in 2022, the period since then is too short to provide any conclusion.) During the first severe market decline, 1973-74, it took six years to get back to even, and fourteen years to get back to a cumulative “normalized” return above 10%, which is roughly the long-term return from stocks.

The next big market setback, 2000-02, had the most negative impact, taking eleven years before finally getting back to even.  And, surprisingly, after 25 years, its cumulative annual return is still below 8%. This is despite above-average returns in five of the last six years.  Finally, the 2007-09 bear market took five years for the S&P 500 to get back to even and fourteen years to regain a cumulative “normalized” return above 10%.

While some may say these are unfair comparisons with starting periods at the beginning of bear markets, they clearly show the damage that can be done if/when you buy near the top or overpay for stocks and how long it takes to recover from the ensuing price declines.  While Your Managers have been around long enough to have lived through these last three severe market declines, we have managed to weather them reasonably well.  We have done so because of our adherence to strict valuation standards, which means, simply, to buy when stocks are cheap and sell when they’re dear.

In general, this keeps us from overpaying, thus reducing the time it takes to recover from bad markets.  While we do make investment mistakes occasionally, our overall record during these same time periods has been good.  We strongly believe that how you perform during multi-year market declines may be just as important, perhaps even more important, than how you fare during bull markets.  While we have no idea when or to what extent that will happen, we know it will, and you’ll find how important it is to pay attention to valuation.

• PORTFOLIO VALUATION. There’s still no change in the marketplace.  Ther’s more cash in accounts than good investment ideas.  Stocks are generally priced to yield mediocre long-term returns.

• RECENT PERFORMANCE. Stock markets yielded moderate gains in August, ranging from flat to up about 2%, with no clear dominance by company size.  For the year-to-date, there is considerable variation in size, with large cap indexes up 8-9%, while smaller stock indexes are down. The broadest index we follow, the S&P 1500 equal-weight index, is up one-half percent for the year. The capitalization weighted indexes continue to be dominated by a small handful of stocks, a condition that historically doesn’t bode well for future returns. Over the past 12 months, market performance also varies widely. Large-company stock indexes are up 12-20%, while mid- and small-cap indexes have remained nearly unchanged. Our group* of portfolio holdings has produced positive returns in all three periods but lag the large cap indexes over the last 12 months.

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 15 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.