Investment Thoughts Q3 2021

 Highlights In this issue:

5 Investment Lessons from the Pandemic - Capital Group / American Funds
The Top 25 Investing Quotes of All Time - Investopedia

Dear Client,

What is the most influential piece of advice you have ever received in your life?  Were those words of wisdom something that shaped a single decision, or guidance that you found yourself coming back to over and over again?  Was the inspiration delivered by a trusted mentor, or did it arrive out of the blue from an unlikely voice of reason?

 Personally, during my school years I was always prone to minor panic attacks ahead of exams.  No matter how prepared I was, there would be that moment where I was sure I was completely oblivious to all of the critical pieces of information.  Fortunately, a song lyric caught my ear and stuck with me: “My friend assures me / it’s all or nothing / I am not worried / I am not overly concerned.”  For whatever reason, those lines never failed to calm my nerves and put me in the right frame of mind to do my best.  I still vividly recall blasting those lyrics just before walking in to take my ACT exam…

As a parent, I like to believe I’ve imparted some lasting pearls of wisdom to my children.  However, it’s hard to argue with my eldest son’s “3 Rules to Life,” which I most certainly do not get any credit for:  1. “Don’t be an Idiot.”  2. “Don’t be a jerk.”  3. “Be Better.”  You can tell that they didn’t come from me just by how succinct they are!

 Within Buttonwood, a team favorite is “It’s not about the coffee.”  The idea is that, when someone in a restaurant complains about the coffee, it’s usually just a convenient excuse to vent and release tension about some deeper concern.  It is a refrain we use whenever we need a reminder to not just stop at the surface, but to dig deeper and try to identify the core issue to present a true solution to the planning problem.

 The following pages contain a number of passages that have qualified as “wisdom” for other investors.  We hope at least a couple strike you as meaningful as well, or perhaps even make a lasting enough impression to be recalled as needed down the road.  When it comes to the “all-time” quotes (pages 5-7), we’ve also included a listing of which we each identify most closely with – we’d love to hear about your top 3 as well.

 Finally, we remain honored that we are able to serve as that source of trusted financial advice for you.  Chris’ long-standing Rule #1 for his career has been, “It’s more important to talk to the client than it is to solve the problem” – but we’ll always strive to accomplish both!

Wishing you a happy and healthy Fall,

 Sincerely,

Greg, Jodie and Chris

Investment Thoughts Q2 2021

 Highlights In this issue:

Should You Be Worried About Inflation - Forbes Advisor
The Reason You Still Can’t Find a New Car or Playstation 5 - Slate.com

Dear Client,

Mark Twain is often credited with the saying, “History doesn’t repeat itself, but it often rhymes.”  It is an adage we find ourselves referring to frequently when it comes to the markets – often as a reminder that, whatever conditions we may be facing, we are almost certainly not the first to be doing so.

 Concerns about elevated stock valuations?  A worry shared by investors during the Tech Bubble of the 1990’s.  A global pandemic?  We haven’t gone a week during the past year without reading a reference to 1918, although 1958 and 1968 also experienced less severe health crises.  Worries about rising inflation?  It’s almost impossible not to have our thoughts turn to the 1970’s.

 The recognition that this path has been traveled before can be comforting, while also providing us with a template to critically evaluate the conditions and prepare an appropriate response.  Nevertheless, there is also a danger in becoming too comfortable and believing that we merely need to follow the roadmap from the past event in order to successfully navigate the present.  There is value in identifying the rhyme within history, but we don’t want to lose sight of the admonition that it does not repeat.

 How does that framework apply to the three primary storylines for the market in 2021?  Our view on each is as follows:

 Price-Earnings Ratios are expensive relative to historical averages, and by some measures rival the levels we last saw during the Tech Bubble of the late ’90’s. 

The statistic is correct, and the elevated valuations may not be sustainable over the long-term.  But acknowledging that is not the equivalent of stating the market is in a new bubble that must pop.  Many of the most highly valued companies today are well-established firms with substantial and rapidly growing earnings.  By contrast, the Tech Bubble is remembered for prizing start-ups that were showing heavy losses and showed no prospects of turning a profit for the foreseeable future.  The question in 2021 is more about determining the fair value rather than the 1990’s dilemma of attempting to predict whether any true underlying value even exists.  In addition, interest rates today are at much lower levels – a 6-month CD yielded over 4% in 1999 – which is more supportive of higher valuations.

 The coming decade could be a repeat of the Roaring ‘20’s as the economy rebounds from the pandemic. 

While many aspects of the Covid-19 pandemic have mirrored the path of the 1918-19 pandemic, extending those ties to the economic and financial prospects for the coming decade may be overlooking a couple of key links.  First, the 1920’s economy was also influenced by the end of World War I, and it is difficult to separate out the respective impacts.  But given the economic boom that also followed World War II (absent a pandemic), assigning 100% of the credit to the emergence from the pandemic would appear to be hyperbole.  In addition, the P/E ratio for the stock market at the start of the 1920’s was historically depressed, creating a more favorable environment for future stock returns and representing a far cry from our reality today.

 Prepare for a return of 1970’s-style inflation. 

These fears are primarily stoked by the record levels of government spending and debt.  We even had a brief flashback to the gas shortages thanks to the recent cyberattack.  A surging economy paired with easy monetary policy from the Federal Reserve is a recipe for rising inflation; however, there is a world of difference between a move away from the ultra-low inflation we’ve experienced since the Great Financial Crisis and a return to the double-digit inflation rates that characterized the late 1970’s.  Two ingredients from the ‘70’s recipe that are missing today: elevated inflation as a starting point (was running 5-6% at the start of the 1970’s) and a disruptive event such as President Nixon moving away from the gold standard.  (See more about potential inflation in our featured articles.)

We want to be aware of history, but also recognize that our current chapter is still being written.  We hope you find that perspective helpful as you come across financial news headlines that simply want to “connect the dots.”With summer kicking into full gear, we hope you are able to take the time to write an exciting chapter in your own family story.  We look forward to hearing about your adventures!

Sincerely,

Greg, Jodie and Chris

Investment Thoughts Q1 2021

Highlights in this issue:

GameStop Holds a Financial Lesson For Kids: Investing is Supposed to Be Boring - The Washington Post
Is College Still a Good Investment - Kiplinger.com
Curling Up With a Good Book - Recommended Reading from Buttonwood Staff

Dear Client,

Do you consider yourself a good driver?  If not, kudos for your honesty!  Studies consistently show a statistical anomaly where the vast majority of respondents classify themselves as “above average” on the road.  One of the more recent, a 2019 survey of American drivers by Esurance, put that figure at 76%.  A full quarter who believed themselves “above average” would be statistically classified as “below average” and proven wrong in their self-assessment.  Was this discrepancy caused by a lack of awareness?  Unlikely, as when asked about unsafe driving behaviors such as speeding, texting or eating behind the wheel, a whopping 93% admitted to engaging in at least one of the behaviors!  Perhaps they considered themselves such above average drivers that behaviors that were proven deadly to the general population posed much less of a risk to them individually?

For better or for worse, a similar sentiment can take hold of investors during bull markets.  When risk-taking is rewarded and almost every gamble pays off, the behaviors previously recognized as dangerous are reinforced as being harmless.  It is in this light that we watched the recent excitement over GameStop (see the article on page 3 for more) and other “hot” sectors of the market.  We’ve seen these stories before, and we know how they end (each of us has at least one “hard-learned lesson” from personal experience to look back on).  It’s exciting and you may arrive at your destination sooner if you drive 90-mph in a 55-mph zone - but do so consistently, and it’s only a matter of time before you are pulled over for speeding or end up in a crash.

 The original question (“Are you a good driver?”) was on my mind because my oldest son has his learner’s permit, and I’ve had to become comfortable relinquishing control while sliding into the passenger seat.  It’s given me a newfound appreciation for my better driving habits – and increased awareness of those not-so-good ones!

When it comes to your planning and portfolio, you have entrusted us to be the driver and we want you to be comfortable with our “personality” behind the wheel.  We choose our vehicle based on its reputation for safety and reliability (think a Toyota or Subaru), choose the quickest route and target a pace just above the speed limit (75 mph on the Interstate).  We strive to limit the risk of a major setback (ticket, accident or breakdown) while realizing there is value in arriving at your destination as expeditiously as possible. 

 For those of you who like to “read the owner’s manual,” we’ve included a wonderful selection of books (page 7) to enjoy outside on a nice Spring day.  Hopefully they will allow you to develop a good investing behavior or two!

 Finally, regular maintenance is as important for your financial plan as it is for your vehicle.  If you think it is time for a tune-up, please give us a call.  Meetings can be scheduled via phone, Zoom, or (masked) in-person; we’d love the opportunity to catch up!

Sincerely,

Greg, Jodie and Chris