Q4 2021 Commentary: Predictably Unpredictable

Pine Haven Investment Counsel, Inc.

Paige Johnson Roth, CFA®

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain

It feels like déjà vu all over again with another strong year in the equity markets despite continuing pandemic fallouts. The equity markets are now in their third year of strong returns. In three years, the S&P 500 Index of Large Company stocks has doubled (annualized return of 26.1%); It was up 28.7% for the 2021. International markets were not as strong and were up 8.8% for the year (as measured by EAFE Index). Surprisingly, the US Real Estate Index was up 46.2% rebounding from last year’s loss of 7.9%.

Many years ago (in the 1970s!), at an investment firm where my father worked, they came up with an investment manifesto of sorts that we now call "the Predictables", We have included an updated version with this letter (see below). Some of our long-term clients will have seen this before as it is the underpinning of our investment philosophy. It speaks to the importance of discipline and muting the noise of the markets.

There is no question that market downturns are unsettling, however the timing of them is impossible to predict. It is a question of when and not if a market correction or downdraft will occur. Historically, the average annual price decline from a peak to a trough in the S&P 5000 is just over 14%; and in one out of five years the decline has averaged at least twice that. However, for investors that have stayed the course the rewards are there as the average annual compound rate (with dividends reinvested) of the S&P500 is around 12%. The data underscore our conviction that the challenge to successful long-term investing has to include temperament and discipline. As renown investor Peter Lynch said, "Far more money has been lost by people preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." As always, I welcome your comments, questions, and concerns. We can't predict but we can plan.

The Predictables

In investing as in life, we do all we can to manage the predictable while understanding that something unpredictable and uncontrollable will present itself.

The Predictables

Wealth will be created through long-term ownership of companies that dominate global market segments.
Wealth will not be created by trying to guess short term swings in the markets.
Low portfolio turnover helps minimize capital gains taxes, improving the “tax efficiency” of your investments and lowering the overall costs to your portfolio.
Most coverage in the media and especially on the Internet will focus on short-term developments.
The US Economy will continue to grow as will other economies throughout the world.
Growth in earnings and dividends are the key determinants of the price of a company’s shares in the long-term.
Proper diversification supporting your individual long-term goals is the best position to weather unpredictable events.
From time to time, we, as your advisers, will select investments that do not live up to our expectations.

The Unpredictables

Which companies or industries in your portfolio will perform best over the next year and which will be the favorites of Wall Street security analysts, or be boosted by an online Meme.
Whether the stock market will go up or down today, tomorrow, next week, or next year.
Whether the dollar will be strong or weak in relation to other currencies.
Whether the Federal Reserve will raise or lower interest rates at its next meeting.
Whether a company’s next quarterly earnings report will fall short or exceed the consensus of Wall Street analysts.
Whether inflation will go up or down over the next few months.
When the economy will enter or exit a recession.
When the next bubble, scandal, terrorism, war or natural disaster will occur.
Which Party will have the upper hand in Washington and what legislation will result.