2019 in Retrospect

As we move towards the end of 2019 we would like to share some thoughts, reflections and reminders:

A) We noticed the ‘reversion to the mean’ principle. This observation characterizing many natural phenomena took place again in the stock market. After a dismal 2018, especially at the end of the year, we enjoyed one of the best years ever for the stock market in 2019.

B) What do we mean by ‘mean’? For the USA stock market returns have been 5 to 6 pct above fixed income for the last century. This means the stock portfolio is double the value of the fixed income portfolio every twelve years. A tremendous over performance. Again this is an average, with higher interim volatility.

C) “We should be greedy when others are fearful and fearful when others are greedy”. Many weak hands lost shares last December while strong hands added to positions!

D) Volatility due to risk and uncertainty create aversion to stocks and reward the risk takers handsomely! Most inversions cannot endure risk and finally enjoy much lower returns.

E) Strategic allocation between asset classes of stocks bonds, cash, real estate and commodities in different currencies determine about 90 pct of portfolio returns.

The residual 10 pct is determined by selection within each class. It is more important to stay the course and focus on strategic rather than on short term deviations implied by tactical allocation.

F) Human ingenuity, great entrepreneurs and business create wealth. Fixed income attempts to preserve it. Indeed the luxurious ‘Park avenue type apartments’ belong to the optimists.

G) More money is lost anticipating recessions and stock market drops than by these events! The pessimists always find excuses not to invest in great businesses.

H) Great investors have ‘a good mind and especially a strong stomach’.

I) Valuations matter: the earnings yield is still considerably above bond yields.

A bear market will take place when earnings recede substantially and/or interest rates increase abruptly. Political events, policy mistakes and external shocks are important. The knowledge of the future belongs to the gods. Let’s not pretend we master it!

J) the above thoughts apply to all markets. However anglo-saxons believe and promote business. They are the champions of liberalism and capitalism despite some deviations. They have strong institutions and protect property rights. This is the kind of team we want to root for the creation of wealth !

We do not forget that ‘luck is better than brains’.