2019 Q2 Newsletter

“I can calculate the motion of heavenly bodies, but not the madness of people.” Sir Isaac Newton

The casual observer of the above chart will note that the S&P 500 closed on June 30 at 2941, virtually unchanged from its level of 2924 back on October 1. As such, one might conclude that equity investors did not (in fact could not) make or lose much money during this period. But the chart does not tell the whole story …

While it is true that those who did absolutely nothing during this period experienced little change in their equity portfolio values, the data suggests that few real-world investors behaved as such. In fact, according to Yardeni Research, investors actually sold more than $500 billion worth of equity mutual funds and ETFs during the 13-week period ended December 31, 2018, after an abrupt 19.8% decline from the September highs. Collectively, these lemmings initiated the largest net redemption of equities since the $600 billion exodus during the Great Panic of 2008. Like then, many investors (and sadly, many advisors) panicked, sold, and in doing so, turned perfectly normal temporary portfolio fluctuations into permanent losses. And since one cannot profit from that which one does not own, those poor saps missed out the market’s best performance in the first half year in over twenty years, and the best June since 1938. But even that does not tell the whole story …

We take great pride in the fact that so many of you entrusted us with your hard earned savings to fund your children’s education, pay off your mortgages, secure a dignified retirement, and leave a meaningful legacy to the people and places you love most. So while the lemmings were selling, DEM’s King Leonidas eagerly returned to Sparta a day early from his family’s New Year’s celebration to do battle. Armed with our disciplined rebalancing approach as shield and sword, we methodically began deploying your year-end cash distributions on the very first trading day of the new year as part of our regular quarterly rebalancing. By the time the dust had settled at the end of January, DEM had confidently accumulated an additional $8MM worth of equities for our clients. No panic. No selling. Not on my watch.

I have no idea whether the time-weighted return of our portfolios was any better or worse than those of the panic-stricken lemmings over the past three quarters. However, since the primary determinant of real-world outcomes is always investor behavior as opposed to investment performance, I am confident that our disciplined approach yielded higher dollar-weighted returns than those rooted in emotion. And make no mistake, it takes dollars, not percentages, to retire with dignity. As the narrator Dilios says in 300: “There is no room for softness nor weakness, not in Sparta. Only the hard and strong may call themselves Spartans. Only the hard, only the strong.”

Don Davey
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise