May 25, 2020

In mid-March, it was pretty clear to all that COVID-19 was going to be a disaster for many people and economies around the world. It has been exactly that, but the direction of the stock markets has not been as easy to predict.

March did turn out to be the most volatile month of all time and we saw the biggest monthly drop since October 2008 (the height of the Global Financial Crisis). Pessimism was at an extreme at the bottom of the decline with many holding out little hope for the near future of the stock markets. Yet, as deaths and unemployment continued to rise, April was the best month for the stock market since 1987.

It’s been an emotional roller coaster. Particularly during the worst of the March decline, factors like long-term prices, fundamentals, and rationality weren’t driving most people’s investment decisions. To justify their fear-based instincts, many convinced themselves that they “knew” that the situation was worse than everyone thought, that they “knew” the market would continue to go down in the next month, and that they’d get back in after further declines. But, as they’ve come to find out, they didn’t know. It was emotion that dictated decisions as people just wanted the pain to stop.

The investors who sold near the lows are now unsure whether to get back in with the markets higher and uncertainty and volatility still high. We see this experience as another in a long line of futile attempts by investors to try to predict market moves based on their feelings.

This is certainly not to say that the worst for stock markets is behind us. There could be another leg down and we could even reach new lows. It couldhappen, but it might not and we’ll only know in hindsight. What we do know is that the bottom tends to come at a time when things seem absolutely terrible. The above quote from investor and writer Doug Kass sums it up: “When it comes time to buy, you won’t want to.”

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Apr 3, 2020

In our last letter, we explained why we think the pandemic seems unlikely to significantly alter the stock market’s fair value.

Now, let’s talk about price.

In crisis periods, stock prices can fall a lot, even if their underlying fair value hasn’t changed all that much. These steep declines are typically the result of decreased liquidity (everyone needing their money back at the same time) and investor fear, both of which tend to reinforce themselves and each other.

But to the extent that these crashes result in prices falling below fair value, prices are likely to recover once the crisis has passed. At least this is how it’s always happened in the past, and we can find no reason to believe it has changed.

We don’t think anyone can reliably know what the mood swings and liquidity cycles of the market will do to prices in the short term. (And we think trying to time getting in and out of the market is more likely to hurt than help, a topic we’ll cover more in our next letter).

But we can feel fairly confident in two things: the value of what we own, and the likelihood that prices will eventually make their way towards that value.

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Mar 26, 2020

In this article we’ll cover the following:

  • The government’s economic response to the crisis (huge and unprecedented)
  • Distinguishing between the pandemic’s short-term effects on the economy (likely severe) and its potential impact on the stock market’s underlying fair value (probably not very significant)

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Mar 13, 2020

As the markets have continued the rapid decline into bear market territory, we wanted to provide you with an update on what we're thinking and how we're managing your portfolios through this.

Learning from past panics

For a little personal perspective, we were remembering back to the craziness of the Global Financial Crisis in October of 2008. At that time, markets were dropping 5-10% per day, too. The feeling of panic and uncertainty was very similar to what we're feeling and seeing this week.

During those difficult days, despite the sick feeling in our stomachs, we started adding exposure to stocks. It wasn't easy, but we didn't think the crisis was going to result in the end of the world's economies and we knew that remaining calm and buying into panics is what long-term investors have historically benefited from. The markets bounced back a bit, but then continued to decline into March of 2009. We felt the pain of our increased exposure the whole way down, but eventually, we were well rewarded for it.

On the other hand, investors who sold out in October 2008 were generally feeling smart for a while, but most were left behind when markets eventually went up. They might have avoided some of the decline in the short term, but they were the ones who were truly harmed when all was said and done.

It's also instructive to look at the stock market bottom, which took place on March 9, 2009...
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Feb 5, 2020

After a year of sizable gains, the global stock market has dropped about 3.5% since news of the virus outbreak in China came to light.(1) We'll discuss the virus scare momentarily, but first we want to share some thoughts on another worry we had recently been hearing a lot about.

All-Time Highs

For several months we've frequently come across headlines and comments about all-time highs in the stock markets. The topic has often been framed as a reason to worry, as if new highs suggest that a decline must be near.

But as we see it, record high market prices are neither particularly newsworthy, nor a cause for concern.

Consider the below chart of global economic growth over nearly 60 years. While there have been slowdowns and pullbacks along the way, the long-term trend has very much been upward. Even the 2008-9 Global Financial Crisis looks like a blip in this long-term history:

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Oct 25, 2019

Over the past decade, stock markets have drifted far from their typical behavior in several ways. There is a big opportunity at hand if markets should end up moving back towards normal as they generally have in the past.

This idea is known as “mean reversion” in investing jargon. It sounds complicated, but it’s pretty straightforward: if a measurement has tended to gravitate towards its historical average in the past, then there’s a good chance it will continue to do so in the future. This is especially true if there are sensible “real-world” reasons to expect the mean reverting pattern to occur.

Below we’ll describe a number of measures that have been historically mean reverting for good reason, but that have strayed very far from their typical levels in recent years.  


We’ve discussed this one often, but it’s a very important and dramatic example of deviation from historical norms.

The chart below shows stock valuations, aka expensiveness, for US, international developed, and (with a shorter history) emerging stock markets.(1)

Click for larger version

A couple things jump out....

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Aug 6, 2019

We all know that buying a home in San Diego costs a lot more than in most cities. But that's always been the case, and probably always will be, because San Diego is such a desirable place to live. More interesting is the question of how expensive San Diego is compared to its own history. This can tell us whether prices are out of whack even after adjusting for the desirability factor.

A good way to measure housing expensiveness is to compare home prices to local rents and incomes. Rents tell us how much it costs to live in San Diego as a non-owner, while incomes show how much money San Diegans have to spend on housing.[1] By comparing home prices to rents and incomes, we can get an idea of their cheapness or expensiveness relative to the economic factors that typically drive them. (This is also known as their "valuation").

Here's a chart of San Diego housing valuation since the late 1970s:

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Jan 17, 2019
Our last letter discussed how US stocks had diverged from international stocks by continuing upwards as the rest of the world drifted downward during the middle part of 2018. US stocks went on to decline sharply after that, ending up with a peak-to-trough decline of almost 20% in just 3 months. This closed much of the gap with international stocks, which fell less than US stocks over that period:


This sudden convergence shows how quickly things can turn in financial markets. And it's not the only recent instance...

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Oct 15, 2018
As we've emphasized over the years, our global, value-based investment approach demands a multi-year timeframe. We often cite 7-10 years as the appropriate period to think about when planning or assessing returns. Such a strategy requires patience, and there are a couple of main risks that can challenge one's ability to stay the course.

1 - Volatility Risk

This describes how much an account's value changes over shorter periods. If volatility is too high for comfort, one might abandon the long-term approach due to a short-term market decline. We know that there will be inevitable and sizable swings in the markets. (Over the last few days we've been tested on that front too). But by placing our clients into portfolios designed to experience a personally acceptable range of volatility risk, we've done our best to minimize the chance that our clients will experience an intolerable swing. This is something that we've been careful to address and are happy to re-address with you anytime.

2 - Risk of "Tracking Difference"

Another and much less discussed risk that has been noticeable lately is what we're going to call "Tracking Difference" — the potential difference in returns between your portfolio and the US stock market.

The US media mainly focuses on the domestic stock market, so that's what most US investors tend to be most aware of. The returns of the bond markets and international stock markets are often just an afterthought, if that. This is kind of strange, as the GDP of the rest of the world is twice the size of the US, and the international stock and global bond markets together are many times the size of the US stock market. But that's the way it is.

The result is that if a US-based investor's portfolio returns track too differently from the US markets, it can come as a surprise. That can lead to a lack of confidence and even the abandonment of a long-term approach.

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Apr 29, 2018
In our last quarterly update, we focused on the extreme stock market optimism that prevailed at that time in late January. At that point, the market was up almost 7% for the year and, as we discussed, investors were by some measures more bullish on stocks than they had ever been.

Before getting to the punch line, we want to further point out that the optimism had been boosted by the fact that volatility in the market had been at multi-decade lows throughout 2017.

From that moment of historical optimism and extended low volatility, the market has given up all its gains for the year, and we are now seeing headlines like this:
Here are some numbers to show just how huge the jump in volatility has been:

  • The S&P 500 has experienced 14 days so far this year with at least a 1% loss after only 4 such days in all of 2017.
  • There have been 7 days this year with over a 2% decline after no such days in 2017. (Source: Albridge Wealth Reporting)
As we noted in that prior letter, "investors on the whole always get optimistic after markets have done well, and they become pessimistic after markets have done poorly. This gets it backwards." So the experience of the markets since that last letter shouldn't really come as much of a surprise.

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