1st Quarter Client Note

Amidst continued slow global growth, particularly in Europe, the Federal Reserve is remaining cryptic as to when it will begin to raise interest rates. Foreign central banks are keeping their interest rates extremely low as well. US economic growth remains sluggish, but is still better than most of the rest of the world. The Fed is justifiably concerned about the effect raising rates would have on the already strengthening dollar – foreigners will then tend to buy dollars to obtain higher returns.

Nevertheless, the S & P 500 (Total Return) Index eked out a gain of .95%. Moreover, investors in the Total US Stock Market Index (up 1.80%) were buoyed by returns in both mid-cap (up 4.59%) and small-cap (up 4.32%) stocks — which significantly exceeded the S & P 500. Real Estate continued to surge, leading all asset classes with an increase of 4.7%.

Interest rates declined slightly, with the yield on the 10 – year Treasury falling from 2.12% to 1.94%; resulting in a gain in the Barclays US Aggregate Bond Index of 1.53%.

The dollar continued to advance, rising another 9 percent against a basket of currencies, reaching a 12-year high.

For an in depth review of the quarter’s asset class performance see the Quarterly Market Review from our friends at Dimensional Fund Advisors; including an essay on how to be a  “Master Chef” in investing.

Just Like Clockwork

At the end of last quarter, with the significant underperformance of international equities, many investors were preparing to abandon global diversification. The MCSI EAFE (developed markets) Index was down 4.90% in 2014. Some of which resulted – for US investors – from the rising value of the dollar. The EAFE trailed the S&P 500 Index in 2014 by 18.59%. And I (reassuringly?) commented that “diversification works, until it doesn’t and then it works again.”

Wouldn’t you know it? An allocation to foreign stocks saved this quarter for investors with globally diversified portfolios. The MCSI EAFE Index gained 3.83%, despite the continued rising dollar. Meaning the gain was extraordinary for the quarter in native currency terms.

Feasting on Buffett

Investors of all stripes are inspired by the success of the legendary investor Warren Buffett and Berkshire Hathaway, Inc. — his long time vehicle for executing his investment ideas. Over the decades, many of his folksy aphorisms have risen to become investment homilies of nearly biblical proportions. Many of them have come from his annual letter to the shareholders of Berkshire Hathaway. This year’s letter, commemorating the 50th anniversary of Buffett taking over Berkshire Hathaway, is no different.

Here are just a few gems on the subject of investing and the capital markets:

“It is better to have a partial interest in the hope diamond than to own all of a rhinestone.”

“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do.”

“Periodically, financial markets will become divorced from reality – you can count on that.”

“We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared.”

The Winning Strategy

Adherents, like us, of evidenced-based, index-like, globally diversified asset allocation investment strategies aren’t generally thought to draw much from the teachings of Warren Buffett – perceived by most admirers to be a “stock picker.” But the parallels are stronger than you might think. In a terrific book (Think, Act and Invest Like Warren Buffett, The Winning Strategy to Help You Achieve Your Life Goals) our friend Larry Swedroe demonstrates that Buffett’s investing style, down deep, is largely informed by evidenced based principles.

Swedroe has written more than a dozen books, one of which, The Successful Investor Today, 14 Simple Truths You Must Know When you Invest (St. Martin’s Press 2003) was among my major inspirations when I started this practice.

Inspired by Warren’s wisdom, Larry’s goal with Think, Act and Invest Like Warren Buffett was to simplify the message a bit — and he has it honed down to fewer than 150 pages. Foremost, is the absolute necessity of having a plan. Your plan should contain answers to the 5 Big Questions: 1) How much can you save? 2) How much risk do you have the ability, the willingness and/or the need to take? 3) How much money will you need? 4) When will you need it? 5) And finally, What do you want to leave?

And execute the plan with an emphasis on low-cost, broadly diversified, passive, evidenced-based investment strategies. As Larry says, “The winning strategy is a simple, elegant and logical one. And because it is so simple, requiring little effort (though lots of discipline), it is also the winning strategy in life.”

Do As I Say, Not As I Do

For proof positive that the journey from Warren’s wisdom to evidenced-based investing is a short one, look no further than Buffett’s 2014 letter to shareholders in which he describes the provisions in his will to take care of his surviving family members, “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”





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