Quarterly Client Letter – 2023 Q2

Recent numbers are now in, with good news to share: With financial analysts describing a “gravity-defying” “monster rally” across major market indices, most disciplined investors have been richly rewarded for sticking with their appropriate investment allocations.

Even had quarterly and year-to-date numbers not been so sweet, we would have advised you to remain invested as planned anyway. The same can be said for whatever the rest of the year has in store. We know markets have delivered positive returns over time, but we never know what they’ll do from one quarter to the next.

So, let’s celebrate the current surge! While you’re at it, keep some of today’s positive energy with you, for next time you may question your resolve. Because, despite the folly of forecasting, the 24x7 newsfeeds are forever planting fresh seeds of doubt in our fertile minds.

The quarter just ended was no exception to this rule. We entered it in the aftermath of the Silicon Valley Bank collapse and the threats posed to our larger banking system. These events were soon followed by political brinksmanship over U.S. government debt. Then there were the wider, geopolitical concerns of the day, with ample news coverage stoking a bonfire of “what if?” anxieties at every turn.

It’s human nature to feel real alarm over real financial threats as they play out. Any of them can generate very different quarter-end numbers. We were lucky they did not.

But that doesn’t mean we should abandon our long-term focus in reaction to near-term news. An evidence-based investor is wise to expect global human enterprise to generate satisfying market returns over time, even as we fortify ourselves for those fewer times when it does not. As Fortunes & Frictions author Rubin Miller, CFA describes in “How Returns Happen”: 

“But if we don’t know which days will be good and which days will be bad, and the stock market goes up over time, the recipe for success is obvious.”

 Just as Miller suggests, we believe investors are best served by building decent portfolios, sticking with them through hot and cold quarters, and waiting for the returns to come in “Field of Dreams” fashion, even when they’re not imminently in sight.

Speaking of visionary thinking, there is recent, less-heralded news we would like to cover today: On June 22, Nobel laureate and Father of Modern Portfolio Theory Harry Markowitz passed away at age 95.

It’s well worth hitting pause to reflect on Professor Markowitz’s larger-than-life contributions to the science of investing. Today, we understand why a whole portfolio can generate more manageable outcomes than its parts. Why we build investment portfolios out of various sources of expected returns, rather than trying to pick the next big winners or dodge current losers. Why we turn to diversification instead of market-timing to manage investment risks.

When Markowitz published “Portfolio Selection” in the March 1952 Journal of Finance, none of these insights existed. The only way to invest was to pick individual stocks, with no idea how each selection might interact with others. The only way to (supposedly) manage market risks was to try to outsmart the market. There was no ability to measure overall returns, or compare them to other strategies you might have tried instead. There were no other strategies.

Imagine that. In a very real sense, this is the impact Markowitz’s body of work has had on you, your money, and your ability to manage the investment risks we still face today.

Markowitz did not single-handedly discover evidence-based investing. The quest is ongoing, and never-ending. But he was a monumental figure in laying the groundwork for the advances we’ve achieved to date. And, although “Portfolio Selection” was published when he was just 24 years old, it wasn’t Markowitz’s final contributions to myriad fields calling for rigorous risk/reward analyses. In a 2010 Journal of Financial Planning, Markowitz commented on his lifelong career:

“I have friends who keep telling me that I should retire, and I can’t. I’m just having too much fun. And I want to have an income stream, because I've got four offices and three of them have bookcases in them. What would I do with all my books if I closed them down?”

So, here’s to you, Professor Markowitz. Wherever you are now, we hope there are lots of shelves.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Stock investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.