Dear Clients and Friends,

The sun has been shining lately, but the stock market has surely been putting a damper on our Spring!

The stock market has had, to put it mildly, a very difficult start to the year. As I write this, the S&P 500 Index is down 17%, the tech-heavy Nasdaq is down 27%, and bonds, typically a safe haven during market volatility, are down about 10%! In short, this market decline has taken pretty much everything down with it with few places to hide.

Markets are selling off as investors digest rising inflation, rising interest rates, and fears of an eventual economic recession. In essence, the market is repricing itself after an elongated period of low-interest rates, Federal Reserve induced liquidity, and several years of stellar returns.

Without question, times like these are tough – for all of us. No one likes to see their portfolio values go down, especially several months in a row. The truth is, the bull market that we have been in has spoiled us. Up until now, stocks had experienced only relatively brief corrections before rallying onto new highs. This is a humbling reminder that this is not always going to be the case.

In fact, this is exactly the kind of environment we have been attempting to prepare you for. In my January Client Newsletter, I wrote the following:

“In the months ahead, you should expect heightened volatility and corrections and perhaps even a bear market. Here’s a suggestion: when looking at your statements – which is nothing more than a point in time of what the market will pay for your investments – discount that number by 10%-20%. This will help you deal with inevitable periods of declines.”

Obviously, we don’t know where the stock market is heading from here. We could rally furiously on the first hint of positive economic or geopolitical news or we could fall another 10% or more.

What we know for sure is that stocks have been the best wealth-creating vehicle known to man, generating an average 10.5% annual gain since 1926. That is a stunning return. The price for that return, however, is scary and sometimes includes elongated bouts of volatility and declines. As I have said in previous client letters, stocks go down much faster than they go up which scares many investors out of their investment plans.

Our investment plan for you is to continue to own world-class businesses with great fundamentals and rising earnings power. We are making some adjustments for many of our clients to deal with this challenging environment. But our overall theme as long-term equity investors in great businesses remains very much intact.

I have been in this business for a long time and have seen many market cycles – including ferocious bear markets – come and go. The biggest mistakes I have seen are investors getting caught up in short-term market movements which makes, as Warren Buffett says, “otherwise rational people do irrational things.” Things like selling great companies because of market volatility only because they can see the prices of their investments on a monthly or even daily basis.

As I have stated before, to succeed in investing, you indeed have to take the good with the bad. Rest assured, we will continue to make adjustments in your portfolio as needed while maintaining a quality and dividend-oriented stance toward your investments.

Sincerely,
James C. Burns, CFA
President