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Last month, we used this valuable real estate to summarize the infamous inverted yield curve and the subsequent pending doom it projects. Well, apparently, that was yesterday’s news and the stock market participants have moved on and up for a matter of fact. The market (as measured by the S&P 500 Index) registered a 2%+ gain for the month of September. A nice little rally from the 1% drop experienced in August. In all fairness, the appearance of an inverted yield curve does not mean we are headed for a recession the next week or even that the stock market is going to crater (at some point). A recession is typically months away or even a few years away (if at all) following the yield curve inversion. But, on the other hand, any financial professional knows this as well as the fine folks on the financial “news” stations. So why the sensationalism of these potential market moving events? Well, we do live in a capitalist society and the more eyeballs on the screen, the more money media earns via advertising. And, believe it or not, negative, fear mongering, and or potentially money losing events garner much more viewership than programming focused on “rainbows and unicorns.” Unfortunately, many people (investors) watch and react to this financial pornography that yes, in the short-term may cause a concern or two, but over the long-term they are merely a minor speed bump on our ascent to true long-term capital growth. No doubt, at some point the economy will slow down and yes, we may actually enter a recessionary period, but we have been through this before. Tell me if I am wrong, but life as we know it today seems pretty good. For instance, going back 50 years… only 9% of households earned more than $100,000 annually (in today’s dollars). Fast forward to today and 29% of households are in this category. In other words, the number of households earning $100,000 a year has tripled! The same astounding positive improvements in our standard of living has impacted the lower income earners as well (i.e, many have been elevated to middle class). By the way, this all occurred during a half century where we saw seven recessions! These statistics came from an article from Mark W. Perry, “America’s middle class is disappearing…but it’s because they’re moving up.” Even in a discussion of what has happened to the middle class, people immediately assume there is a negative reason for why it’s shrinking. Then again, with the news we are fed, who can blame folks for being negative. As investors, we stay positive by keeping our focus on what’s depicted in the graphic to the right. The individual companies that are responsible for our standard of living dramatically rising over the years. Better known as Corporate America! As I mentioned, yes, we know we will experience recessions, but we also know over time these companies create value (i.e., make money) resulting in our investments increasing in value thus allowing us to prosper in this incredible world we are fortunate to be living. Rest assured this cycle will continue to repeat itself over and over again. So, please do yourself a favor and watch the financial news stations purely for entertainment (as we do) or turn it off and go out for a walk! There are rainbows and unicorns waiting to be found somewhere out there!

There is an old investing adage: Time in the market beats timing the market. Even in a normal investment climate, adhering to this sage advice is tough for many individuals. It is downright impossible for most investors when the stock market is 1) setting all-time highs on what seems a daily basis, and 2) riding a 70%+ rise from the lows set nearly one year ago. The itch to time the market (i.e., try to sell at the perceived top) strengthens with each new high. History and experience tell us, this is an itch you do not want to scratch! The mere idea of market timing is flawed from the get-go. Some of the most successful investors are those who buy and hold stocks for the long-term. For these folks, the goal is to find great companies selling at the right price and then invest in them. Essentially, one decision needs to be made to achieve success. This is not the case for a market timer. Let’s count the number of instances a market timer needs to be correct in order to achieve some modicum of success. The trader must: 1) Be able to make an investment that increases in value (like the long-term investor), then 2) Know when to sell said investment prior to its pending decline, then 3) Know when to re-enter the stock market at its low (or near low), and then, last but not least 4) Decide what stock(s) to buy upon re-entering the market. It stands to reason that if you are trading out of certain stocks, when you re-enter the market there is a good chance your trading inclination will steer you towards other better-looking stocks. My eleven-year-old knows it’s harder to be right four times versus just once. As a market timer, you best be on your game. Any slight mishap could cause significant damage to your portfolio returns. Take a look at the above chart. For the period from 1990 – 2017, if a market timer was not invested for the single best day each year, he/she would underperform the stock market (as measured by the S&P 500 Index) by nearly 4% a year! Miss even more days and the pain accelerates. Unfortunately, this is just the beginning… The reality of market timing is you are changing sides. You no longer have the singular belief that stocks rise over the long-term. You may still believe this, but you have introduced a second thought that you can sell out of the market before it corrects to the downside. If this is your behavior, the odds are you will miss more than just the one best day. You called the market high for a reason, so there is a strong probability you will cling to this thesis until you are proven correct or maybe even worse… buy back after much of the investment return has been made. Unfortunately for the market timer, bull markets last much longer than bear markets. Look no further than the chart to the right. Yes, bear markets are tough to stomach, but you have to bear with them (pun intended) in order to ensure you participate in the entire growth of the stock market. Lastly, looking at this chart you have to wonder or be fearful of entering the stock market near or at a market top. What happens, if you make your first investment in month 134 of a 135-month bull market? Shouldn’t you wait to till you see a correction before investing? Market timing has to make sense here, right!?! Well, in the real world, where you most likely will not time the market to get out at the high, you are most likely not going to invest at the exact worst time (i.e., a top before a correction). But, for the sake of argument, let’s pretend this happens. To the right is a graphic that depicts an individual that in January 1970 began saving $1,000 a month into their bank account. They did not invest it in the stock market until a market peak. The first peak was 1/11/1973. On this date, this person had savings of $48,000, invested it in the S&P 500 Index and subsequently watched 48% of its value evaporate. The horror! Fast forward to this past year end and you see what that initial investment is worth today… 3,000% more. This person continued to save $1,000 a month between corrections and did not make an investment until the market peak. In each case, the initial investment has provided a positive return thru 12/31/2020. It is clear the longer you stay invested the greater your return. In fact, on average it takes a little over 4 years to recoup your original investment from a correction of 20%+. This might be why, investment professionals (such as us) pontificate to only invest in the stock market if you have 5+ years to ride out the volatility. Regardless of the 900 or so words I’ve written here, clearly illustrating that trying to time the market is hard and quite frankly has no purpose; people will continue to try. The stock market is certain to correct in the future, as history and experience tell us so. History and experience tell us something else as well… the more time in the market the better off you will be.

In January 2020 the stock market (as measured by the S&P 500 Index) was coming off a year with 30%+ gains that only fueled the question of when will the market correct. This common refrain we hear following a large upward move in the market was only amplified by the market’s continued rise through mid-February…February 10th to be exact. This date marks the beginning of one of the fastest stock market declines in history. In just over a month’s time the stock market gave back 34% of its value. We all know what fueled the sharp move. It was not the actual pandemic of which this generation has never seen…but how investors reacted to it. Or shall we say, overreacted to it. Emotions tend to take over during trying times, so the overreaction is understandable. For those who stayed invested, or even better, invested more, the reward was as remarkable as the decline itself. In the graphic above, you can clearly see the astronomical rebound most sectors experienced in the nine-month period through December 31, 2020. Overall, the stock market rose nearly 70% from its March low. It is clear the lack of clarity in February and March destroyed lots of investor confidence. But, as the authorities started to wrap their mind around the pandemic, the Federal Reserve unleashed trillions of dollars into the economy, and a way out of this started to become clear (i.e., vaccines)… investors comfort continued to return resulting in an S&P 500 Index up 16%+ for the year. 2020 was a wild ride, but as we reflect on it, we wonder if it needed to be so volatile? With over two decades of experience, as industry veterans we are less impacted by short-term hysteria and more inclined to view any news with a long-term lens. Our conclusion was that the pandemic gave us the opportunity to purchase some really inexpensive stocks. Our playbook through our history shows we are most likely the ones buying stocks while others are running for the exits. But this time around it seems investors were running faster than ever. Why? Look no further than the graphic to the right. This is from a paper titled Why Is All COVID-19 News Bad News? by the National Bureau of Economic Research. In summary, 91% of stories by U.S. major media outlets are negative in tone versus 54% for non-U.S. major sources. What’s most notable is that the negativity level never really declines for the U.S. media, even during historically positive scientific developments. Stories of increasing COVID-19 cases outnumber stories of decreasing cases by a factor of 5.5 even during periods when new cases were declining. (Take a second and let that sink in!) Common knowledge is that negative news sells better than positive news. Simply, it triggers so many more emotions (and quicker) than anything positive. Negativity also seems to linger. Therefore, the actions of media companies make perfect sense to us. If your business is to attract eyeballs to your material, you are going to ride that hot horse as long as you possibly can. We don’t blame the media for the over-extended stock market declines, as investors are in control of their own money, but it is clear they fuel the fire. Note:Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. Chart(s) courtesy of Visual Capitalists and National Bureau of Economic Research.

On October 31, 2018, the stock market (as measured by the S&P 500 Index) closed at 2,711, roughly 7% below where it started the month. Historically, not horrible price movement, but eye-opening nonetheless. This dropped the year-to-date performance to barely breakeven. Devastating news (to some) for a somewhat benign investment climate for the past few years (i.e., a lack of volatility)! So, the natural question is… “what gives… what changed with our sweet, beloved stock market?” The market momentum has been halted, quite quickly. Rather than focusing on what’s been a strong economy, the herd of investors have turned their attention to newsworthy issues that continue to build what is known as the wall of worry. In theory, investors must climb this wall of worry in order for the stock market to resume its march upward. What is this current wall made of, you ask? Well, search any news source (since they all love negative news) and you will find a plethora of potential issues building the blocks of said wall. To name a few: · Brexit, · Italy’s budget crisis, · A slowdown in global economic growth exemplified in China weakness, and · Tariffs There is another half a dozen or, so we could list here. All of these are legitimate issues, but are they enough to derail a strong economy? Time will only tell. Historically, this country (and the rest of the world to a certain extent) ultimately works its way through these difficult global crises, but how long it takes is always up for debate. If there is need for intervention or assistance (i.e., monetary easing), that is the time the Federal Reserve needs to earn it’s keep. Speaking of the Federal Reserve, it is here where we turn our attention to when dissecting this recent market correction… not the issues constructing this supposed wall of worry. We’ve seen this act before… like eight months ago in February. Way back then, many of the issues above were building, but it was interest rates and how the Federal Reserve was going to manage them that got all the attention as the stock market corrected, to a certain extent. In fact, the correction in February (-10.13%) was nearly identical to the recent October correction (-9.71%). This is more of a coincidence than anything else, but there is no doubt that the Federal Reserve and the anticipation of their pending moves to tighten monetary supply is a main reason for these corrections. You see, their decisions can and will have a lasting impact on the entire economy and subsequently the stock market. In addition, they should factor in all the wall issues when setting their monetary policy. As investors, this is where we will focus our attention as we look out to the long-term.

On more than one occasion we have utilized this valuable real estate to discuss interest rates and their impact on, well, really anything that has to do with the economy. So, when the Federal Reserve lowers the fed funds rate to ZERO, it’s worth noting. And when they go onto to say they would keep this rate near ZERO for as long as it takes the economy to recover from the coronavirus crisis, it’s worth writing a monthly newsletter about it. Not only to explain its historical significance, but more importantly, it’s impact on us as individuals. This is newsworthy as the Federal Reserve laid out a policy that should spur higher inflation. This differs with the typical balanced approach where the Fed lowers interest rates to spur economic activity and then will increase rates when growth accelerates (driving higher inflation). Now, regardless of rising inflation (whenever that may happen), the Fed has said they will remain on the sidelines and allow higher interest rates to persist. In the words of the Fed, they will let inflation run “moderately above 2% for some time.” (For those keeping score at home, 2% is the Fed’s standard target rate for inflation.) That’s the current state of the Federal Reserve’s policy on the fed funds rate. They want to see the economy grow again (i.e., create jobs) and they are willing to risk higher inflation to see it happen. When will we reach this level of robust economic activity? Who knows! As the great Peter Lynch once said: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” Needless to say, we agree. Zero percent will impact the overall economy, but it should have an even greater impact on us as individual investors and consumers. For the latter, the historically low fed funds rate will impact consumers’ borrowing rate. Whether it’s a home loan, student loan, auto purchase or credit cards, you have an opportunity to lock in some crazy low rates that should help drive the growth of your assets/investments. For instance, take your home mortgage. If your interest rate today is in the 4% - 5% range, you now have the opportunity to refinance down to the 3% range, if not lower. Not only will you be paying less for your home (i.e., lower interest), you can invest this monthly savings. Let’s say you have a $600,000 mortgage and you refinance from a 4.5% rate to a 3% rate; your monthly savings will be just over $500. If you take this savings, invest it and your money grows at the stock market historical annual return (i.e., 9%+), this savings will grow to just about $100,000 in 10 years. If you held this loan for its entirety (30 years), the invested savings will climb to just under $1,000,000 ($941,581 to be exact). The beauty of this is it has nothing to do with the economy. The ability to lower your cost structure and subsequently invest the savings is in the consumer’s hands. Whenever the economy rebounds, it has nothing to do with your personal situation. Zero rates will definitely impact us, the consumer. For the individual investor, zero interest rates may have an even greater impact as they affect thousands of companies. Just as a consumer has the opportunity to lower their cost structure, the same opportunity exists for businesses on a larger scale and at lower rates. As homeowners, banks loan us money based on our creditworthiness and the value of our main asset… our home. For Corporate America, these companies are granted funds by selling bonds that is based on the creditworthiness of their business (i.e., cash flow). For the best companies, their interest rates are hovering around the 1% - 2% range for even long dated bonds (i.e., payable over 30 – 40 years)! For example, about a month ago, Google (Alphabet) raised funds by selling bonds that mature in the year 2060 and the interest rate is 2.25%. Unreal! Did they need billions of dollars in capital? Goodness no… they had 30 billion dollars of free cash flow last year! But, just as we, the consumer, take advantage of low rates, so do smart companies. Google raised that capital because interest rates are so low and they are confident they can produce a return on capital that is greater than their cost of capital (i.e., 2.25%). As investors, we seek the historical returns of the stock market (9% range). According to our analysis, Google historically has a return on capital somewhere in the 20% range. So, as long as management produces services customers demand (and will pay for), there is a high likelihood, they will create real value when their capital cost is 2.25% and their expected return is 20%+. This real value (i.e., earnings/cash flow) will ultimately drive the market value of the company resulting in gains to us, the investors. Regardless of current market valuations, the best companies in the world should thrive in this ultra-low interest rate environment. And overtime, as the business grows, there will be shareholder value created, whether through stock appreciation or dividend payouts. As investors, consumers, and business leaders for that matter, the Federal Reserve is essentially forcing us to participate in the effort to reinvigorate this economy. As mentioned above, we don’t know how long rates will be this low (i.e., we are not economists), but we do know they are here now for us to take advantage.

We are officially in the back half of the year… one that most everyone cannot wait to see come to an end. Everyone except maybe for a handful of tech titans. We’ve said it before, a crisis typically speeds up a change that was already in the works. For the trillion-dollar club, this means an expedited migration to and acceptance of their products/services. That’s right, I said “trillion-dollar club.” Currently, there are four companies with a market capitalization greater than $1 trillion (see graphic). In fact, Apple, is closing in on $2 trillion rather rapidly. The general reaction of the majority of people is: No Way! These stocks are overvalued! How can it be that a company is worth more than a trillion dollars?!?! Well, it be, and would you believe me if I told you it is not the first time (and probably not the last). In the early 1600’s, the Dutch East India Company (DEIC) peaked at a market value of 78 million guilders. According to folks much brighter than I, this equates to $8.2 trillion in today’s dollars. DEIC had a monopoly on all Dutch trade in Asia. In addition, the world’s first true financial bubble, Tulip Mania occurred during this period. For a bit in the 1700’s, the South See Company (SSC) positioned itself has the British version of DEIC. Their valuation grew to $4 trillion in today’s dollars. Their reign ended painfully with the Treaty of Utrecht (for unscrupulous reasons). In the early 1900’s there was one name synonymous with wealth… John D. Rockefeller. His company, Standard Oil (SO), was the largest company in the country. Prior to 1911 when the Government ordered its breakup, SO had a $1 trillion market capitalization (in today’s dollars). Rockefeller’s personal fortune would be worth nearly $400 billion today (even with having to break up SO). To put that into context, this country’s richest person is Jeff Bezos, coming in at $185 billion. While we make a big deal about this, it’s not even close to Rockefeller. More recently, PetroChina (PC) topped out in the $1.7 trillion range (in today’s dollars) in 2008. As oil prices increased from $20 a barrel in 2002 to around $140 a barrel by 2008, PC’s stock price was driven up making it the largest oil company in the world. With the subsequent global financial crisis, PC saw its valuation decline to where it sits today, just over $100 billion. All of the companies to the right shared one very important characteristic… they dominated their era’s most valuable commodity. In the 1600’s/1700’s countries were realizing there were goods available in different parts of the world. Therefore, the trade routes were of premium value. The means by which these dominant players became so valuable could be questioned, but they were the top companies, nonetheless. The same goes from Rockefeller’s control of the United States oil market. Standard Oil’s refining capacity, as well as its pipelines and gathering systems dominated the industry. And this industry was at the forefront of that era’s most valued asset… the many uses for refined oil. How about the fearsome foursome of today? What is it that makes the stock market place a trillion dollar plus value on them? More importantly, is it warranted? They, like their predecessors are dominating the most valued commodity of this era… Data! More specifically, the use and management of data. Google is so dominant in search functionality that you no longer search for information, you google it. Amazon is the first and last name in online shopping. While not the largest overall retailer, they are the driving force in the rapid adoption of shopping from your couch. Microsoft has their hand in everything (cloud storage, gaming, productivity software, etc.). And Apple has created an ecosystem that is unlike anything we’ve ever seen. While actual valuations can be debated amongst these four (i.e., are they under or over-valued), there is one common thread. They have all harnessed data in their respective industries that has vastly improved our lives. Their ability to do this on an ever-increasing scale continues to drive their sales, earnings, cash flow and hence their market capitalizations. Trillion, is a big number and big word we don’t use often, which is probably the reason most people do a double take when uttered. It’s not often, but as we’ve seen through history pure dominance warrants such a valuation. These days, we just happen to be witnessing not one, but a handful of dominant companies. Proof, that with all the craziness going on around us, we are still living in a great time… maybe the greatest of times. Note:Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. Historical market capitalization figures from Money.com

The last few months has been defined by one subject: Trade. More specifically, trade with China. For a good month or so, it appeared the U.S. and China were very close to coming to a new trade agreement and now, according to the powers that be in the White House, our trade partner essentially got cold feet. So, back to the drawing board. Much of this news (and non-news) is reflected in the stock market gyrations. We can talk at nauseam dissecting trade, tariffs, etc. but we won’t. Let’s just sum this up with 1) tariffs over the long-term are bad for all parties involved, and 2) the economies of both superpowers would be better off as trade partners. Everyone knows this and everyone knows the U.S. needed to take this stance (probably over a decade ago). And when I say “everyone,” that includes China. So, expect some resolution. Now that we got that topic digested, let’s move onto the real topic of this commentary… the annual gems that come out of the Berkshire Hathaway annual shareholder meeting (and subsequent interviews). Every year, we are treated to the insights of two of the greatest investors who have ever walked the Earth; Warren Buffett and Charlie Munger. They share thoughts on a number of topics (that are all worth reading), but this time around one quote from Mr. Buffett stands out to me: “I think stocks are ridiculously cheap if you believe ... that 3% on the 30-year bonds makes sense.” Ah… interest rate talk! An important topic (and its influence) we have written about in the past. What Mr. Buffett was referring to is reflected in this chart… the relative value of stocks (S&P 500 earnings yield) compared to the yield of bonds (10-yr treasury). In a nutshell, the idea is that the earnings yield on stocks and the yield on bonds should follow each other. If bond yields go up (making them cheaper), then they become more attractive relative to stocks, which then must become cheaper to become attractive. The opposite is where we find ourselves today, bond yields are low, and with the earnings yield where it’s at, stocks look cheap… “ridiculously cheap” according to maybe the greatest investor of our time. This definitely provides a level of comfort for equity investors. (For what it’s worth, we are still finding good value, so we agree.) But, what about the second part of Mr. Buffett’s statement: “if you believe … that 3% on the 30-year bond makes sense.” He is alluding to the fact that this is very low and quite frankly, it will not sustain itself over the long-term (i.e., something needs to change). It’s tough to argue with him on this, but people have been waiting for interest rates to ascend for some time (especially after the decline of interest rates over the past 35 years). While we don’t try to predict interest rate movement over the short run, we do agree that eventually they will go up. But let’s dissect this a little more. Over time, how high can they go up? Where will they peak? Looking at this chart of the 10-yr treasury, interest rates will be hard pressed to ever reach historical highs set in the 1980’s. In fact, rates would have to move quite a bit to even reach the level of the late 1990’s / early 2000’s. The point is, even with the inevitable rise in rates, we will still be living/working/investing in a pretty favorable interest rate environment. And as we know, interest rates are somewhat important in our world… if you don’t believe me, just ask Señor Buffett!

In investing, just like in life, people tend to lock onto a concept/term they hear and refuse to let it go. It takes on a life of its own until… well, we no longer wish to discuss it. But during its life, its importance grows and grows until it gets to the point where you have to wonder what the hell are, we even talking about. “It” in this case, is the current recession but more newsworthy (apparently), the shape of said recession and subsequent economic recovery! I’ll admit, as long-term investors we have very little use for the shape game. But, the fervor around it deserves a brief discussion. Over the years, economists have gotten a bit liberal with the letter shapes they use to try to simplify the description of a recession & recovery. The five to the right are the ones we have heard the most regarding our current situation. One (The V-shaped) being the quickest recovery, another (the L-Shaped) being the longest drawn out recovery, and then a few in-between. Maybe it’s just me, but I notice all five shapes share two important attributes. They start down (sharply) and ultimately, they end up. Too simple? I don’t think so, because it’s true. Is there any redeeming reason to pay attention to the actual shape? I mean, if they all start and end the same way, why would an investor care about the shape? As a human, of course, no one wants to see a depression (L-Shaped for those keeping score at home) and all that comes with it, but as an investor with a long-time horizon… we are wasting valuable oxygen with the “what shape is it” discussion… in our opinion. Apparently, for others, this is a worthy topic. Odd to us, since you really don’t know the shape of a recession and recovery until after it has passed or at least well into the recovery. Therefore, the constant interviews/discussions/proclamations centered on trying to attempt to predict what type of recovery this will be is pretty much futile. If you predict a U-Shape rebound and act on it, how is that any different than if you predict a Swoosh rebound and act on that? Unless you are a short-term trader, you are investing at good prices or at the very least in prices below where they started at the beginning of the recession. Once you make this investment, you are not selling at least until there is some sort of recovery. Outside of the dreaded L-Shape, the average length of a recession is less than a year. Most likely, you will be seeing gains before you can even correctly define the shape. Now, if you want to go even further out into the future, two, three, five, or even ten years… history tells us we will be alright. The above chart is the S&P 500 Index during my adult lifetime (the past 30-years). During this period, even with two major recessions (indicated with grey shading), the stock market has risen over 350%, nearly 12% annually. Even with our unprecedented crisis and subsequent actions, when we look at the past 30 years ten years from now, there is a good chance our current recession (as represented by a grey bar) will fit nicely into a similar looking 30-year chart. This has nothing to do with drawing shapes or even a graph. It has to do with what this graph represents… capitalism at its best! An idea that has not stopped or been slowed down for nearly a century and we are not going to start questioning it now. Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.

he further along a bull market runs, it is only natural to wonder “when will it end” or even “how will it end.” At the end of the first quarter of 2020, the bull market is over, and I’d bet dollars to donuts that not many saw a virus being the source of the undoing. Actually, I should say, the actions taken as a result of this virus, is the source of the undoing of our beloved bull market. Over the first three months of the year, the stock market (as measured by the S&P 500 Index), was up nearly 5% at one point. Then saw a rapid decline to a low of -30% (down 35% from the all-time high). Only to finish the quarter at down 20%. The kicker, this rollercoaster occurred over only 29 trading days. Needless to say, volatility is in full force! The question is, is it warranted? We’ve discussed at nauseum that uncertainty is the stock market’s perceived worst enemy. Investors become quite uncomfortable when they don’t have a clear picture of the future of the economy. But… a 35% move down over 29 days! This seems quite extreme. Could it be a sign of the times… the current environment we now live? Even compared to the last bear market (the Great Recession of 2009) the 24/7 news cycle (I use that word loosely) is way more amplified. Back then, Twitter and Facebook were a shadow of what they are today. More and more Americans are stock market investors via their participation in 401k’s and 403b retirement accounts. So not only is the news everywhere, everyone has a vested interest. In a volatile stock market, this may be a recipe for disaster. Even the most seasoned investor can get caught in the hysteria. As long-term investors, we recognize the gravity of the current situation and the myriad of potential results in the short-term, but we also need to revisit why we are invested in the first place. We accept the short-term volatility of the stock market for its long-term growth potential. As we laid out, the volatility was fast and furious (and remains so). No doubt, scary for most… but when we focus on the future, this bear market has rather quickly, produced investment opportunities we have not seen in 3 – 4 years. For us, over the period of two weeks in March, we estimate we made as many trades as we typically do in a year’s time. This was driven strictly by prices of some of our favorite stocks trading down 30%+. It only makes sense that if we thought Starbucks was a good value at $90 a share, we were pinching ourselves when it dropped to $56 a share in a month’s time. Right?!?! Yes, business will be slowed when you can only drive-thru to get your latte… but we sort of have an idea that this won’t be the case forever. There are more than a few examples such as Starbucks (i.e., Nike was trading at $62, down from $103). And we expect the same for those investments… that over time, they will be worth more than they are today. In fact, I stumbled upon this great chart to the right. Depending on how low the stock market drops, over a 5-year period, the odds are in your favor that your investments today will be worth more in 5 years. For this particular correction of 35% (high to low), there is a 99% chance the market will be higher in 5 years. And to boot, in this scenario, the average return is 78% over this period. If you are a believer in history is bound to repeat itself, this should make you smile! Where we go from here in the next six months, year, two years… we cannot tell you. The stock market can continue to go up from here, it can correct slightly and then go up, it can test the low set in March, or it can go up and down for the foreseeable future. Unlike many pundits on the squawk box, we are not too interested in calling the bottom. We are interested in making good investments in high-quality companies positioned for solid future growth. And if the March low was not the bottom, we look forward to adding to our favorite stocks when the opportunity presents itself again. We have not seen prices this low, since…. well, the last crisis. Be well, be safe and we look forward to a bright future! Note:Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.

“What You Don’t Know, Won’t Hurt You” … Apparently, Not If You Are The Stock Market As of March 5, 2020, the stock market (as measured by the S&P 500 Index) has registered just about a 7% decline for the year.** This is roughly 11% below the all-time high set on February 19th**, and therefore considered a correction by the powers that be… given the drop of more than 10%. For those of you keeping score, a 20% decline will trigger the dreaded bear market. The question on top of nearly every investor’s mind is not so much about what or why this has happened, but more about when is it going to end? The “unknown” has commonly been the cause of rapid drops in stock prices and continued volatility. Stock market investors rarely favor the unknown…especially if you can’t see further than your wrist. And the longer this unknown persists, the more it can fester in the short-term investor’s mind leading to emotional investment decision making…which is not good for anyone! We are not breaking news here. Investors have two major concerns on their minds. First, the Coronavirus and its spread across the globe. For our purposes (investing), the question is how much the spread of this virus (or maybe better termed at this point… the fear of the spread of this virus) will impact the global economy. At the outset, the fear has closed factories, cut air travel, canceled tradeshows, closed theme parks and everyday businesses (mainly in China and now Italy). Without knowing when authorities will get their hands around this virus, many investors will continue to predict the worse. If containment/resolution doesn’t come soon enough, companies may start losing business, employees could lose their jobs, fiscally irresponsible companies may go out of business, and these events will lead to a recession. That’s the cliff notes version of the worst-case scenario. We are not economists and we definitely are not members of the WHO (World Health Organization), so we will keep our predictions to ourselves. However, we will share our thoughts on how this impacts our long-term investment projections. As you may have imagined, it doesn’t. The chart to the right depicts the ability of economies/stock markets to bounce back from disease outbreaks within six months. That being said, when we say long-term, we mean 5+ years… so needless to say, the virus doesn’t really impact our investment approach. The second major concern for investors was/is the real possibility that Bernie Sanders could get the Democratic nomination. This cloud lifted somewhat this week with Joe Biden’s solid showing on Super Tuesday, leading many to believe he will represent the Democratic party this November. Mr. Biden is more moderate and let’s just say Mr. Sanders is less than pro-business. Prior to Tuesday, it was very clear (not discussed too much on the squawk box) that stock market investors were a bit spooked at the possibility of Mr. Sanders on the ballot. Just as we are not members of the WHO, we have never been a guest on Meet The Press as we possess very little political insight. That being said, we do know stock markets have risen and declined under both Republican and Democratic leadership. So, regardless of who resides at 1600 Pennsylvania Ave come January 2021, we’ll keep our focus on the companies in which we invest and look to achieve our long-term results. Yes, certain industries may bode well under certain Presidents and decline under others… but for the entire stock market to correct due to the specter of an unfriendly to business President taking office… that’s a little, well… short-sighted! Especially nine months prior to election day. One final thought… when the stock market rises nearly 30%, as it did last year, complacency can and does set in. Even without the virus concerns or the fast-approaching presidential race or any other issue coming our way (i.e., impact of such low-interest rates), the stock market was due for a correction. Stock prices do not go straight up. It just doesn’t work that way. A year like 2019 makes investors forget that we invest in the stock market willing to accept the short-term volatility in order to receive the long-term gains. Gains that are historically the best out there for the common investor. We know full well that stocks as a whole do not go up 30% every year and vice versa. What we do know is that over time the stock market returns between 8 – 10% on an annual basis. The total return of the stock market for the past 5 years was 47% (or 9%+ annually).** The stock market of 2020 will take its course. Where it finishes the year is anyone’s guess; we do not know and will not venture a prediction. What we do know, as long-term investors, we’ll pick our spots to buy discounted securities as we firmly believe in the long-term viability of our economy and the select companies in which we invest. Till next time… Marcus **Stock market return figures are for the S&P 500 Index and from Yahoo!Finance (finance.yahoo.com) Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.

The Stock Market Review This past year saw the stock market (as measured by the S&P 500 Index) gain more than 28%. It’s greatest rise since 2013’s gain of 29.6%. A tremendous year on its own but definitely less exciting when you put it into broader context (i.e., look beyond a twelve-month timeframe). Let’s dig deeper. The best thing going for the 2019 stock market was it’s starting point. In today’s instant gratification world, we quickly forget what happened even yesterday, let alone way back in 2018. In September 2018, the S&P peaked (at that time). Roughly three months later on Christmas Eve it had bottom, nearly 20% lower. At the time, freaking people out, but in hindsight, this correction was setting the stage for 2019! While 2019 was a phenomenal year, the reality is, the price of the S&P on December 31, 2019 was just up about 10% from its high set 15 months prior. With this being the case, the real question is why was our Christmas ruined in 2018 with such a precipitous decline to only see it all recouped (and then some) in 2019? The stock market is considered a leading indicator. Meaning the prices/market valuations are driven not only by the current fundamentals of companies, but maybe more important, the forecast for the future. Remember, in 2018, we were knee deep in a trade war with our largest trade partner… China. This was freaking people out! In addition, there were fears of a global economic slowdown as Europe (and Asia to a certain extent) have continued to stumble not only from a production standpoint but economic policy as well. Also, there were concerns the Federal Reserve (“The Fed”) would tighten monetary policy (i.e., raise interest rates) when they should maybe be loosening. Needless to say, none of the above fears materialized. Most importantly, there is a phase one trade deal with China and the Fed began lowering interest rates. These event(s) plus starting at a recent low, helped set the stage for the great returns of 2019… now what to expect going forward. It is a fool’s game to try and predict the direction of the overall stock market in the short-term, but we will point out the facts we know about today’s market and what events may impact the stock market in 2020. With a near decade long bull market and coming off a fabulous year like 2019, the natural inclination would be to assume 2020 has some tough sledding ahead. Many people will adopt this thought process and sell at any hint of negative news. Well, the reality is, even with this bull market and the recent run up in 2019, the stock market is coming off a 20-year period of underperformance. This chart to the right shows the many up years for the S&P since 1997. But, when you look at the past two decades, the average annualized return of the S&P is just below 6% (if you include dividends, just below 8%). Both of these figures fail to achieve the 9 – 10% historical average annualized return of the S&P. From a technical standpoint, the 28% return in 2019 really just helped the S&P start catching up to its historical average. On top of this backdrop, the things to watch for in 2020 are: · Interest rates: These are always a factor in the direction of the stock market. At historical low levels, today’s rates are a strength for all things business… including the stock market. The Fed’s moves here (most likely lower) will impact the direction of the stock market. · Trade agreements: The President continues to re-work these. The progress made here will continue to be applauded by the stock market and vice versa. · Global markets: Europe and Asia are struggling (especially compared to the US). Their ability to improve their economies is something to watch. · Presidential election: While this won’t occur till the 4th quarter, it will most definitely impact the stock market. For the stock market as a whole, 2020, will be an interesting year. The strength of the US economy cannot be denied. And this is a great place to be investing (not just for 2020 but for years out). You have to feel very comfortable with the long-term possibilities. But we are living in some crazy times with many unsettled issues and potential roadblocks. A turn towards a negative outcome and no doubt the short-term market will reflect it. On the bright side, this should provide some investing opportunities in great individual companies with tremendous long-term outlooks. We just need to navigate the choppy waters. New Investments In 2019 Speaking of opportunities, as is typical of our investment approach, in 2019 we had very little activity. We continue to buy long held positions for new clients when the price is right. In addition, we are always trying to identify quality companies that are participating in investment themes with long-term potential. In 2019, we managed to find four new positions that not only fit our themes but were trading at the right price (for us). Here’s a little background on each: Levi Strauss & Co. (LEVI) Nearly 170 years after its founding, LEVI has finally become a public company. Well, they actually had a stint as a public company only to be taken private… so this is their second go around coming public in March 2019. As most anyone, we are very familiar with this infamous clothing brand and after completing our analysis we began adding the company to our portfolio in April. LEVI reminds us a lot of Nike. It clearly is a valued brand that also has embraced the digital opportunity present these days. The ease with which companies can sell direct to the consumer (DTC) is only going to benefit those with a sizable following. The two biggest benefits of a successful DTC program: 1) Tight relationship with customers, and 2) Improved profit margins. Nike has exhibit this for a number of years already and we see no reason why LEVI won’t experience the same. In addition to the DTC opportunity, LEVI is at the beginning of a world-wide expansion. Opening up new markets around the globe combined with a DTC strategy should only grow this already proud brand. For us, it’s all about management’s ability to execute that will drive the level of success LEVI experiences over the next decade. Rollins, Inc. (ROL) A collection of pest and termite control businesses headlined by the brand Orkin. ROL is a company we’ve had our eye on for many years, but recently started buying last June as the valuation was more to our liking. This company fits an investment theme we have benefited greatly from over the years… Home Related. There was an old statistic (not sure if it’s still true) that a home is rebuilt every 17 years. Whether the number is accurate, who knows… but the idea is the same. Any company that is involved in fixing/building a home or servicing a home, it is worth a look as an investment. Needless to say, ROL fits the bill and they just so happen to be a well managed business. We look forward to ROL being a solid addition to our portfolio for years to come. PayPal Holdings (PYPL) For nearly the past decade the world’s move to credit/debit cards from cash continues to pick up speed. We’ve been fortunate to benefit from this transformation with our investments in Mastercard (MA) and Visa (V). In 2015, EBay spun off PYPL. While we have owned a bit of it from that point, it was not till this past year did we add new money to it. While PYPL is a different animal than MA & V, they will still prosper from this continued migration to plastic from cash. And what pushed us into the stock at this time was their continued innovation. While they are in their infancy in monetizing Venmo, it is remarkable over 50 million people use this application. There is no doubt PYPL will have a say in how the world pays for things in the near and long-term future. The Charles Schwab Corporation (SCHW) When we made our investment in SCHW in September our thought was to get in early as we view SCHW transforming from a brokerage firm to a full-blown bank. For reference, banks basically make money on interest… so, the more deposits/assets it can bring in, the more money they will make. While banks are not historically super impressive investments, the thought of investing in one of the world’s great asset gatherers as they make their march from broker to bank is very appealing to us. Fast forward two months and it appears we might be onto something here… SCHW made a buyout offer of TD Ameritrade. This is the second part of our thesis… it’s not just about bringing in assets. In today’s world, in our opinion, people’s investment accounts (especially retirement) are at the center of their financial well-being… it is no longer their savings or checking accounts. Furthermore, it will be the goal of all financial institutions to house all of one’s accounts. Well, the financial firms with the investment accounts already seem to have a leg up on the traditional banks as they all strive to be your all-inclusive financial home. In summary… we are comfortable with these new investments and look forward to adding to these positions when/if future opportunities present themselves (i.e., short-term discounts). Have a wonderful 2020 and we look forward to connecting with you throughout the year!

Through November the stock market (as measured by the S&P 500 Index) was up 25%+ for the year. A reflection of a strong domestic economy, cheap money, and the most recent corporate tax cuts. To simplify, businesses are doing great and consumers are not doing too bad themselves. These positives seem to outweigh the less than stellar economies of our trade partners as well as the gloom of the tariff war. All that said, then why in the world have investors pulled more money from mutual funds and exchange-traded funds than any other time on record?!?! So far this year, investors have withdrawn $135.5 billion from U.S. stock mutual funds and exchange-trade funds. Even crazier is that this has been going on for the past seven consecutive quarters… going back to the second quarter of 2018. In short, for nearly two years, investors feel compelled to redirect their equity investments to other “less risky” investments such as bonds and money market funds. Two asset classes that are typically used for safety and income. Unfortunately, these days, with such low interest rates, the dividends paid by blue-chip companies is greater than what bonds are yielding. So, again… why are investors doing this?!?! If you are a client of ours, you have more than likely heard this refrain more than once: “80% of investment success is predicated on math and facts. The other 20% is behavior.” This record outflow is primarily based on people’s fears of the stock market and the current events that are playing out on a daily basis. Mainly, tariff talk and when is the next recession going to start (it has to be soon, right?). Listen to the squawk box long enough and some of the nonsense that the talking heads spew daily starts to become people’s reality. And quite frankly, it’s understandable that people get freaked out and run for perceived “safer” investments. Needless to say, this is no t an approach we’d suggest for anyone interested in building long-term wealth. Speaking of, there is a silver lining to this story… at least for those of us building long-term wealth. While there is much banter about the length of this bull market and it has to end sooner or later, these record outflows historically are an indicator that the stock market has even more room to run (higher). Simply, the stock market will not correct to “bear market” levels (down 20%+) if everyone is not invested in it. If there are record amounts of cash sitting on the sidelines, anytime the stock market dips 5% or even 10%, people will come rushing in to buy on these dips. As we like to say, the dancing doesn’t stop until everyone is on the dance floor. It is only then, when a bad song comes on and everyone leaves the dance floor and there is no one left in the seats to take their spot on the dance floor. Ultimately, all investors will be in the equity markets before any meaningful correction takes place. With a strong economy to support it, this stock market still has some legs (i.e., room to rise) before the music stops. At least that’s what history tells us! We’ll have to wait and see if history truly repeats itself.