To Our Business Partners

SILVER ANNIVERSARY

As we write this, it has been twenty-five years since the internet bubble of 2000 burst, leading to negative stock returns for the major market indexes for three years in a row.  It followed a period of massive speculation – mostly in technology and telecommunications companies – where the conventional measures of valuation were thrown out and new valuation measures were invented to justify the prices of the day.  Many who were caught up in the hype of that period lost significant amounts of money or were wiped out completely.

Now, twenty-five years later, some believe we are approaching a similar crossroads in the investment world.  One never knows for sure; it only becomes clear after the fact.  But by many measures, the stock markets are now near or above some of the extreme valuation measures which set record highs back in 2000.

Some observers believe that major market cycles last from twenty to thirty years.  This is due partly to the fact that most “investors” who made the mistakes of the last cycle top are no longer around (too old or too broke) to influence the next cycle top, which then comes to be dominated by a new group of participants who don’t have the benefit of experience.   

While we have no way of knowing how influential this concept is, it may explain a sentiment heard recently on a financial news program:  “I have no problem paying 50 times earnings when a company is growing at 75% a year.”  While this could be true, there is no mention of how likely such a growth rate can be sustained for any significant period.  History suggests that such optimistic growth rates are highly unlikely to persist for very long.  It brings to mind the quote attributed to philosopher George Santayana:  “Those who cannot remember the past are condemned to repeat it.”  Buyer beware!

PORTFOLIO VALUATION 

The last few days’ setback in the stock market has lowered our group’s* composite price to 92% of estimated value.  The shortage of cheap stocks still keeps us from deploying cash.  We own more cash in client accounts than we have good investment ideas. 

RECENT RESULTS

All the stock market indexes we monitor fell in February, from 1-6% with smaller companies suffering the largest declines.  As a result, many of the indexes are showing small declines for the year to date.  Over the last 12 months, there has continued to be a large gap in the performance of the various indexes.  The large cap indexes continue to dominate – up about 19-20% — while the smaller company indexes have advanced 7-9%. Our group* of portfolio stocks has performed somewhat better than the broader market. 

*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.