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“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”

-Charlie Munger


A Focus on Quality—an ongoing tribute to Charlie Munger

For those of us who’ve committed our lives to sharing investment advice, no review of the past three months would be complete without acknowledging the amazing life of Charlie Munger. While Warren Buffett has been the folksy public face of Berkshire Hathaway, his decades-long sidekick was the one who converted Buffett from a “buy any business at a cheap price” to “buy only good businesses, at a fair price.” It’s a good reminder when you step back and consider building a portfolio. We own securities represented by tickers that are priced daily in the market. But ultimately, we’re owners and lenders to a broad group of companies and governments. It pays to be thoughtful about the quality of those entities we will own.  It makes the ongoing decision to identify and retain talented managers who have demonstrated a long-term track record of knowing how to identify valuable businesses, often times long before the broader public does so.

Market Review—the FED does its job, albeit not complete

The driving force for the 2023 market was the breaking of inflation from its runaway period in late 2021 through 2022. The rate hiking cycle was designed to slow the rise in the cost of goods and services, and while we have yet to reach the Fed’s 2% target, we’re much closer to historical trends with the most recent CPI readings at YE23 being below 4%.  A remarkable feat by any measure considering it peaked back in 2022 around 9%.  The graphic below demonstrates this move very clearly.

That said, most of 2023 saw a few large technology companies contribute almost all of the gains to the point where the “Mag 7” became more valuable than entire segments of the global markets. The graphic below makes this point nicely.

The final nine weeks of the year saw things broaden out as interest rates fell and risk appetites expanded. This is part of the natural cycle of investing; sometimes, the short-term reflects improving/deteriorating business conditions, and sometimes, it just reflects a change in sentiment. It generally pays to align with improving conditions and use the mood swings to restore allocations to their desired balance. Our portfolios benefited greatly from this break to the upside across the broader markets, which included our defensive allocation seeing a healthy move as well.

Q4 Portfolio Activity—

After an active 3rd quarter highlighted by portfolio moves intended to grab broad exposure over targeted factors, the year’s final period let the designed allocations do their thing. Both stocks and bonds rallied on market hopes for lower interest rates, confirming historical evidence that the period after interest rate hikes have concluded is among the best for investors.

For taxable accounts, we traded out of the Stone Ridge Diversified Alternatives fund (SRDAX) prior to their year-end distribution solely for the opportunity to sidestep taxes for our clients. You’ll see the position re-established in your January statements as we have a continued belief in this position’s value within our defensive allocation.

2024 Risks and Outlook—

With businesses generally in good shape fiscally, we see three main themes driving markets in 2024:

  • The direction of interest rates, namely whether the FED moves to cut rates.
  • The correlation between stocks and bonds.
  • Ongoing Political/Geopolitical issues—elections and so much more.

For perspective on each, let’s look at some graphics:

Not that we think forecasts mean much, but as the graphic shows, you can find extreme views on all sides of the interest rate forecasting game. We’re remaining on the shorter end as compared to the average duration of the US Aggregate Bond Index. This is a decision that will allow us to benefit from shorter term yields while experiencing less volatility than portfolios with longer term exposures to the fixed income market. We accomplish this through a number of techniques, not the least of which is to allocate to alternative assets to bonds that further mitigate risk while still offering attractive return profiles.

Stock & Bond Correlations—

The last 20-years saw a period in which stock and bond prices zig-zagged in such a way that bonds provided a healthy way to offset the downside of equity markets. We’ve recently experienced a return to a Cold War-era relationship between the two primary asset classes moving in tandem with each other. As the FED right sizes its rate policy in the coming year, it will be front of mind for us to note what comes of this critical risk/return relationship.

Geopolitics & Elections—

All kinds of concerning events loom worldwide, from the Middle East to Ukraine to Taiwan to the U.S. Presidential Election. While any of these events could throw markets for a loop, we’ve faced these things before, and it hasn’t paid to bet against American resiliency.  Over the years, very few geo-political events have ever had a lasting impact on the broader, real economy.

Each of these areas brings risks and opportunities, but none warrant bold positioning at the moment. Given the uncertainty of each and their secondary role relative to their impact on business conditions, we point back to the wisdom of Mr. Munger’s quote in producing solid long-term results.

And for the long list of concerns that can at any point hurt markets, we do take some comfort in seeing the large (and still growing) amount of cash/money market funds with the potential to be deployed in something more productive.

We continue to focus on preparation over prediction and to put Mr. Munger’s quote in tennis terms; we look to minimize the impact of “unforced errors.” We view our investment committee’s thought diversity and flexibility as assets in our service to you, our dear clients, and hope our communications here help convey that reality.

All the very best to you and yours for the year to come.