2018 Year-End Letter, Conclusion

Link to Part 1  (What Makes Us Tick)
Link to Part 2  (General Conditions)
Link to Part 3, Sectors  (Steep Corrections During Expansions)
Link to Part 3, Sectors  (Financials and Industrials)
Link to Part 3, Sectors  (Technology)
Link to Part 3, Sectors  (Materials and Energy)
Link to Part 3, Sectors  (Cons. Discretionary & Comm. Svrcs.)
Link to Part 3, Sectors  (Healthcare and Cons. Staples)
Link to Part 3, Sectors  (Utilities and REITs)
Link to Part 4  (Bonds and Gold)
Link to Part 5  (The Dollar)
Link to Part 6  (Global Investing)

In our 2018 year-end message we've presented what we believe to be the characteristics of good portfolio managers. We've expressed the sense of security we gain in the understanding that while not all good investments make money, if we strive to make only good investments the odds are strongly in our clients' favor over the long-term. We highlighted the whys and wherefores of our present sector and regional weightings. We shared our views on the importance of maintaining a global investment mindset and we expounded on why we think that many currency traders once again may be on the wrong side of the dollar going into 2019.

All of that time, effort, analysis and presentation aside, the true beauty of markets lies in their perpetual, and unpredictable, motion. We accept (embrace even) the fact that, while our present positioning is the product of intense analysis, things will absolutely change over time; some things more rapidly than we may have previously anticipated. And as things change so must our perspectives, and so must our allocations.

Bottom line: At PWA our egos are not invested in our positions; we are indeed forever striving to prove ourselves wrong. It's not in the least bit important to us that the market resumes its bullish march as we enter 2019, as our analysis presently suggests it may. What's important to us is that we see things as they are, not as how we, or others, might like them to be. 

In a recent blog post I suggested that "things as they are" are in essence a reflection of the mood of the 7+ billion of us who inhabit the Earth. Here's from that essay:

Always remember, the market is nothing more than a reflection of the actions of humans, nothing more, nothing less.

As I said in this week's video, the underlying current (general conditions) is still moving in the direction of expansion (albeit slower than even a few months ago; hence, the World Bank's less rosy outlook), while the winds of late have literally pushed the ship (the market) backward, against the current. Those winds lightening up, if not reversing, would be a very good thing for the stock market.

Back to those humans: The ones who trade stocks often pay little or no attention to the underlying current; to them the surface wind (what stock prices are doing) is everything. All the while, the actions of their 7 billion Earthly neighbors as they work, play, save, spend, or not, determines the direction of the current (i.e., the prospects for economic growth and corporate earnings the world over). 

Our experience has been that if you can identify the direction of the current and invest accordingly, while recognizing that it will get extremely windy at times -- yet all the while pointing with the current -- the odds of long-term success are in your favor.

Again, for now, the current appears to still be moving toward growth. And, yes, it's very windy out there!

In the close to last year's year-end letter, we essentially made the same "human action" point, and yet we expressed -- our ongoing research and assessments notwithstanding -- how there'll forever be no making perfect sense of the markets; which is of course a timeless message, as is the closing paragraph, so we'll leave it there this year as well:

....it's the attitudes, the desires, the greed, the fears, the whims of humans at any given moment that ultimately determines pricing -- be it of Tesla stock (which utterly defies any conventional valuation model) or cherry tomatoes -- within the global marketplace. 

Hence, our ongoing, and painstaking, analysis of the data that inform us on what people (consumers and producers alike) are doing, where they're spending their money and allocating their resources, whether or not they're working, and how they feel about their present lot, as well as their future. And, perhaps most critically, when it appears as though their collective psyche has pushed stock prices further (in either direction) than what the data suggest their direct experiences justify.

With regard to the latter, the fact that we've all witnessed firsthand how folks can act irrationally, how, contrary to conventional economic thought, they don't always act in their own best interests -- how, therefore, their thinking is all-too-often the definition of inefficient -- entirely proves that markets are inherently anything but efficient.Academia's unwillingness to accept this reality speaks to the human mind's need to make perfect sense of things. Better, and safer, when it comes to the financial markets, to resist that need!

Lastly, speaking of how folks (specifically you readers who happen to be our clients) feel about their present lot, we'd like to borrow the final paragraph from the "Our Purpose" page of our own website: 

If our clients live their lives in comfort, if they go about their days without a financial worry, without reacting to or fretting over the inherent volatility of financial markets — if our commitment to them instills, or enhances, that sense of wellbeing — we are indeed successful as a firm.

Thank you for reading!