(An audio version of this letter can now be found as Episode 45 of The Unlimited Podcast by Ginsler Wealth. Use the link provided or find us on your favourite podcast app.)

To Ginsler Wealth’s Clients:

This past August, in the middle of this past calendar quarter, equity markets around the world experienced significant declines. This was particularly evident in the U.S., driven by several of the Magnificent Seven[i]. Contributing factors included a slowing economy, job creation not meeting expectations, Buffett selling half of his favourite stock (Apple), and companies investing billions in NVIDIA processors and chips not seeing the anticipated returns.

Coincidentally, I chose the August long weekend to visit a resort in my favourite place on earth, Algonquin Park, where there is no cell reception.

Or so I thought.

In the very early hours of Monday (August 4) morning, a faint, single bar of service must have magically appeared, and a few errant texts slipped through, along with a single Wall Street Journal news alert notification…

“Oh shoot,” I said to my wife. “Japan’s stock index fell 12.4% last night!” (Full disclosure: I didn’t actually use the word “shoot”).

Despite my excitement about being disconnected for a few days, I felt this news warranted driving out of the resort until we found reliable cell reception. We were like characters from the movie Twister, but instead of chasing tornadoes, we were chasing cellular service.

When I saw two bars of reception on my screen, we pulled the car over to the side of the dirt road, and I quickly caught up on what was happening in the world and markets.

It wasn’t pretty.

 

DO SOMETHING!?!

During those ugly days in early August, the Japanese stock market was actually down about 25% from its July high and the U.S. stock market was down about 8.5% from its July high. See chart below…

With 2022 now far behind us, investors may have forgotten what it feels like to have a big down day (or a few days). This is normal for equity markets. For investors, this is the required cost of striving for solid long-term returns. But history has shown that the “Average Investor” often reacts impulsively or out of fear when markets suddenly decline—with a feeling that they must do something. As the table below shows, historically, this has resulted in the Average Investor significantly underperforming relative to almost any relevant asset class or benchmark. While the data below is a few years old, I am confident its conclusion has not changed materially in the last few years.

So what happened following August’s sudden declines? As is often the case, the markets’ steepest declines are quickly followed by steep increases (as you can see in the chart below). By the last day of the quarter, the S&P 500 closed at an all-time high, and Japan’s Nikkei index had recovered much of its decline.

When viewed on a longer-term basis, these market blips become irrelevant (see chart below); but in the moment can feel like they are the beginning of the end! Over the past ten years we have experienced numerous events that have shaken the markets. Here are ten big ones as summarized by ChatGPT:

1. 2014 Oil Price Crash: A sharp decline in oil prices, beginning in mid-2014, impacted global markets, particularly energy stocks and economies reliant on oil exports.
2. 2015-2016 Chinese Stock Market Turbulence: A selloff in Chinese equities and a devaluation of China’s currency led to global market volatility and declines.
3. Brexit Referendum, 2016: The United Kingdom’s vote to leave the European Union on June 23, 2016, caused immediate market uncertainty and declines, particularly in European stocks and the British pound.
4. 2018 Trade Tensions: Ongoing trade disputes, especially between the United States and China, led to market volatility and corrections throughout the year.
5. COVID-19 Pandemic, 2020: The onset of the coronavirus pandemic led to one of the most severe market crashes in history, culminating in significant declines in March 2020 as global economies went into lockdown.
6. 2020 U.S. Election Uncertainty: The uncertainty surrounding the U.S. presidential election results and associated political tensions contributed to market turbulence in late 2020.
7. Supply Chain Disruptions, 2021: Global supply chain issues, exacerbated by the pandemic, led to inflation concerns and subsequent market volatility.
8. Ukraine-Russia Conflict, 2022: The Russian invasion of Ukraine in February 2022 resulted in geopolitical instability, rising energy prices, and global economic uncertainty, affecting global markets.
9. 2022 Inflation and Interest Rate Hikes: Rising inflation rates and subsequent aggressive interest rate hikes by central banks, particularly the U.S. Federal Reserve, led to market corrections and increased volatility throughout the year.
10. Banking Sector Concerns, 2023: Issues within the banking sector, including the collapse of several regional banks, triggered market declines and fears of financial instability.

Interestingly, ChatGPT neglected to include the horrific events that occurred one year ago on October 7, 2023, and the subsequent unbelievable events that continue to this day. I feel it is important to acknowledge this sad anniversary. I continue to pray for the return of innocent hostages taken into Gaza, for peace in the Middle East, and for an end to the abhorrent antisemitism we have seen all over the world.

The events above, along with countless others, profoundly influenced global stock markets, each causing varying levels of uncertainty, fear, and shifts in investor sentiment. And yet, simply holding the S&P 500 index through those last ten years of market blips, would have generated an approximate annualized 11% price return (or 13% total return, when including dividends).

On the topic of doing nothing, the latest episode of The Unlimited Podcast featured award winning author and my first finance professor at Ivey Business School, Stephen Foerster. We discussed his latest book, Trailblazers, Heroes, & Crooks: Stories to Make You a Smarter Investor. Professor Foerster specifically recounts a few stories of trailblazers and heroes who were masters of the art of doing nothing – or as Steve labels it: Masterly Inactivity. Rather than repeat those stories here, I encourage you to listen to the episode if you haven’t already.

 

SO WHAT DID I DO? (TAKE A GUESS…)

Back to the side of the road…

With my pulse initially racing, my mind worked quickly to calculate what my next moves should be:

• Are our client portfolios overly exposed to the “Mag 7”? No.
• Are our client portfolios sufficiently diversified to handle an equity market pullback? Yes.
• In our actively managed equity and hedge strategies, will the underlying managers take steps to maximize opportunity or minimize loss? Yes.
• With a long-term lens, did that morning’s market action change anything we have implemented in client portfolios? No.

I very quickly concluded that the best course of action was to do nothing.

Having done the necessary work in advance, and knowing that we had carefully and diligently constructed our clients’ portfolios to handle market volatility[iii], the only thing left for my wife and me to do was to turn around, drive back to the lake, and hit the water…where things were much calmer…

—————–

All that being said, there’s actually a lot of activity – investment and other – going on at Ginsler Wealth, and I look forward to sharing it with you in next quarter’s letter. Maybe I’ll call it the “Do Something Edition”.

Thank you for your trust, support, and confidence. We are available 24/7 should you need us.

Sincerely,

Brian Ginsler
President & CEO

 

 

—————–

[i] The term “Magnificent Seven” in the context of the stock market refers to the seven leading technology or tech-related companies in the United States, known for their significant impact on the market due to their large market capitalizations and influence. The Magnificent Seven typically includes: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), NVIDIA (NVDA), Meta Platforms (META): formerly Facebook, and Tesla (TSLA). These companies are noted for driving substantial market trends and innovation, often serving as a barometer for the technology sector and broader stock market performance.

[ii] Source: J.P. Morgan Guide to the Markets 2021-03-31. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the
20-year period ending 2019-12-31 to match Dalbar’s most recent analysis.

[iii] As always, each client’s portfolio is constructed for their particular needs, goals, and objectives, and as such, may react differently under varying market conditions.

On February 24, 2024, Warren Buffett issued his always-anticipated, and widely read annual letter to shareholders. This letter, began with a special tribute to Charlie Munger, who passed away on November 28, 2023, just 33 days shy of his 100^th birthday.

Of note, Buffett very clearly, and without any reservation admitted (or revealed) that Charlie was and has always been the brains behind Berkshire’s entire strategy (Buffett calls him the “architect”), while Buffett was (in his own words) simply the “construction crew”.

In other words, while for decades the world has lavished enormous praise on Buffett for being the world’s genius and best investor, it appears that all along, the accolades should have been going to Charlie.

Each year Buffett uses his letter to provide an update on Berkshire’s activities, but – we believe – it is really a platform for him to attempt to educate other investors on how to achieve success. Here are four top themes and lessons that we’ve identified from his latest letter. (All quotes below are from this years letter).

1. Buy Wonderful Businesses at Fair Prices, Not Fair Businesses at Wonderful Prices

Perhaps Charlie’s most important strategic instruction to Buffett, or as Buffett says “abandon everything you learned from your hero, Ben Graham”. Does this mean value investing is not the right approach? We don’t think so – it just means having an intense focus on the “value” you are paying when buying what you believe to be great companies.

2. Buy, Hold and Measure for the Long Term

When you do find these wonderful companies, buy and hold them for the long term, with little focus for the daily “and, yes, even year-by-year movements of the stock market.” For individual investors, this means: don’t trade frequently (or speculate), and don’t have an intense focus on short-term results. At Ginsler Wealth, we also believe that even yearly reviews of performance can be too short-term. Investing is a very long-term pursuit. As our Q4 2023 Quarterly Letter pointed out, if U.S. equity investors (as measured by the S&P500 returns) reviewed their investments based on 2023 calendar year results, they would be ecstatic. But looking back just one further year to 2022, their overall 2-year results would be less than mediocre.

3. Don’t Expect Home-Runs (from Berkshire)

Buffett goes to great lengths in this year’s letter to make clear that Berkshire’s size and lack of options of “moving the needle” means “no possibility of eye-popping performance”. He instead suggests that the future for Berkshire looks like “a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond ‘slightly better,’ though, is wishful thinking.”

(Secretly, I believe Buffett is trying to signal to readers the type of investor he welcomes at Berkshire, and the type that should invest, or speculate, elsewhere.)

But his forecast doesn’t sound very optimistic. Or does it? You may recall from Ginsler Wealth’s Q2 2022 Quarterly Letter, if an investor can achieve average returns but avoid major losses, resulting longer-term returns could likely be great. In fact, we believe that is the formula for investing success. We advise our clients to expect “reasonable” long-term returns (not homeruns), but with a likely lower chance of large drawdowns. When this approach compounds over many years—not scrutinized over every single month, quarter or even year, as per #2 above—we expect our clients to come out ahead.[1]

4. Ignore Pundits, Forecasters and the Like

Buffett says “pundits should always be ignored”. As an example, he later says “Neither Greg nor I believe we can forecast market prices of major currencies. We also don’t believe we can hire anyone [emphasis added] with this ability.” Anyone! At Ginsler Wealth, when asked to make any predictions of the future, our answer is always the same: “We don’t know”.

 

Our approach to “not knowing”, is to build diversified portfolios that we believe should perform well, held over the long-term, with less chance of capital loss or impairment. Seems like we’ve been listening to Buffett all along![2]

 

You can read Ginsler Wealth’s summaries of Buffett’s 2022 (last year’s) Letter and 2021 Letter at the links provided.

 

[1] Investing is inherently risky and nothing above should be viewed as a guarantee or promise.

[2] Nothing in this article should be deemed investment advice.

 

Image Credits:

A. Costanza: Dave Quiggle
B. Mosby: Architect Magazine
C. Munger: Lane Hickenbottom/Reuters from Business Insider