February 2024

To Our Business Partners


Throughout history, the financial markets have gone through relatively long cyles, interspersed with shorter intermediate cycles.  The latter usually receive the most attention and are influenced by significant shorter-term events. By far, the most significant long-term influence on markets has been the decline in interest rates.  Your writer is old enough to have witnessed the absolute peak in interest rates in September 1981.  Rates have declined ever since, which created an enormous tailwind for financial assets.

Looking more closely over “recent” history there have been two major cycles – 1972 through 1999 (27 years) and the current one – 2000 to the present (23 years, so far). While there are many factors influencing market cycles, many observers suggest that these long cycles are also heavily influenced by demographics.  It should be no surprise that in the 20-30 year cycle duration, the majority of investors who have lived through one cycle are gone (retired or deceased) by the time the next cycle is reaching its end. Human nature suggests that the new group will inevitably act similarly as the earlier group, never having learned from the mistakes of the previous generation.  Philosopher George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.”

Looking again at the long-term decline in interest rates, the vast majority of investors today have never experienced a period of rising interest rates, until recently.  Is this possibly why there has been an almost universal expectation that rates will be coming down soon again?  We certainly don’t know the answer to this, but we’re quite sure that basing your expectations for future financial asset returns on an interest rate trend that may be over can be dangerous to your financial health.  The “hurdle rate” we use to value companies is cast in stone, and will never vary based on some wrong-headed forecast of interest rates.  We prefer to look at potential investment opportunities on their price-to-value relationships rather than hop on the latest trend.  Economist Herbert Stein said, “If something cannot go on forever, it will stop.”


Goodness, Mr. Market is not being the accommodating fellow Benjamin Graham wrote about.  The collective price of our widely held stocks* stands at a very high 90% of underlying value.  “Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business.  Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.”  We’re patiently waiting for the “desperation” phase which will yield more numerous bargain stocks for us to buy.


The month of January was decidedly a mixed bag in terms of returns, with most of the indexes declining in price.  Only the large cap indexes produced positive returns.  As we have discussed previously, the markets have become increasingly “narrow,” which means fewer and fewer stocks are driving the capitalization-weighted indexes higher.  While it’s only January, it’s been reported that only TWO mega-cap stocks were responsible for 60% of the return of the S&P 500’s gain of 1.6%. All the indexes representing smaller companies declined 2-4% in January. Over the last twelve months, indexes show similar results, with the large cap indexes advancing 12-30%, while the smaller cap indexes were flat to negative.  Our group* of portfolio stocks have produced positive results over the longer timeframes.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 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.