I'm happy to report on the continued progress of our long-term plan during the very eventful first six months of 2026.
Please note that I don't mean “progress” in the narrow sense that our account values rose, although they did. If our account balances were actually down during this period, in one of the equity market's quite frequent drawdowns, the things that matter most to us—the remarkable increases in the earnings of our portfolio companies, as well as our rising dividend income—would still have produced genuine progress toward our goals.
As always, I divide this note into two parts: a restatement of our unchanging investment principles and policies, followed by whatever current observations can sensibly be drawn from this most turbulent half year.
General principles
- We are goal-focused, plan-driven, long-term investors, working over years and even decades toward the attainment of your most important financial goals. We believe in holistic wealth management, which integrates retirement income, asset management, asset protection, estate planning, and tax management into a cohesive strategy.
- We believe that for almost all our clients, the main reason you are building up liquid assets of stocks, bonds, mutual funds, and exchange-traded funds is to use them for passive income. The main goal of most people’s portfolio long-term is to use those assets to supplement the guaranteed income from Social Security and pensions. The goal of the portfolio is not solely to focus on the rate of return, but also to grow indefinitely. At some point, you will either use it during your lifetime or pass it to your kids.
- We believe that money is just a resource and a tool. It is not the goal in and of itself. We want you to use the money you have to enrich your life with the things most people really desire: fulfilling relationships, memorable experiences, and a positive impact.
- We believe in time segmentation, where you should have money in various buckets: now, soon, and later. Now is cash for needs within the year. Soon is usually 2 to 10 years and stable investments like cash, bonds, and annuities. The later bucket is for money 10 years or later and that is where stocks reside for the best long-term growth. However, those stocks are typically the most volatile. But because you have money in now and soon, you can ride out the volatility.
- The sequence of our decision-making process is always: first, quantify your goals; second, make a rational plan for achieving those goals; and finally, create a portfolio whose historic returns seem best suited to your plan.
- Unless your goals change, there should be no reason to alter your plan. And if your plan remains in place, so—broadly speaking—will our portfolio.
- We do not react to current events of any kind, whether economic, financial, geopolitical, or otherwise.
- We believe that the economy can never be consistently forecast, nor the markets consistently timed.
- Hence, we've decided that to capture the full long-term returns of our equity portfolio, we must remain fully invested in it in “good” markets and “bad.”
Current comments
- There has rarely been in my experience a more eventful six-month period than the one just past. A major war, severe disruption in energy prices, inflation, the sudden threat of higher rather than lower interest rates, equity valuations near historic highs, extreme concentration in the broad market averages, the total collapse of Bitcoin and the precious metals, and by far the biggest initial public offering in history—around spacecraft, of all things. Have I left anything out?
- How would one go about making a rational investment policy out of this maelstrom? The answer—as I believe will be intuitive to all my clients—is that one doesn't, because one can't. It's at such times that we can stand back and almost celebrate such chaos, for one compelling reason: it has nothing to do with us.
- As indicated above, we have goals, a plan, and a portfolio as closely aligned with both as we know how to make it. In practice, we are very broadly diversified equity investors, and we rebalance annually—the latter to systematically reduce our exposure to richly valued market sectors so we can increase our ownership in out-of-favor (and perhaps relatively more reasonably valued) areas.
- It will not have escaped your notice that this is the opposite of what most investors do, especially at times like this: they go chasing the market sectors that have already appreciated the most, in the apparent belief that they can only go up even more.
- Meanwhile, we who see ourselves as long-term owners of consistently superior businesses as distinctly opposed to traders in “the stock market” can only marvel at the extent to which the earnings of those companies have soared, and are continuing to do so. Moreover, their profit margins are at all-time highs, and they continue to raise their dividends, even as they invest in even more innovation and business growth.
- None of this is meant to suggest that this hugely emotion-driven stock market can't significantly and even savagely correct at any moment. It can, and if history is any guide, it will—probably when the consensus is least expecting it. And because we know that our inability to time it is total, we will plan to ride it out, as we always have.
I'm here to respond to any and all questions and concerns you may have. Thank you, as always, for being my clients. It is a privilege, and indeed a joy, to serve you.