Dear Friends,

There are a couple of powerful factors that help explain why most know about the Swine Flu, but very few are familiar with the Spanish Flu. The first is a concept that psychologists refer to as “Recency Bias”, which is the proven tendency of humans to place much greater emphasis and fear of events that happen recently.  The other is the hypersensitive media environment of today.  It is widely understood that we are twice as likely to consume negative news coverage as positive news coverage, and so it is not an accident that we get significantly more negative coverage (especially in a 24-hour constant news cycle). 

Sir John Templeton, widely regarded as one the greatest investors of all time, famously said decades ago “In all my 53 years of investment counsel, there’s never been a year without problems, but for every problem, we have 10 blessings, (but) you only hear about the shocking things. So please don’t be discouraged by the horrible things you’re flooded with and take time to find out what the underlying facts are.”  Wise words – so let’s take heed and review some key facts:

Fund outflows in Q4 were the highest – EVER…and that presents an attractive buying opportunity.

Small cap pullback of 24% was the 4th worst quarter ever.  Small cap valuations are now at 13x on a price to earnings (P/E) ratio, which is well below historical averages of 16.5.

S&P 500 pullback of 21% at year-end off its highs with a forward P/E of 14.4 vs. long-term of 16.1.

The average return the year after a down year in the S&P 500 is up 10.7%.

Going back over the last 100 years, there have only been 8 instances where the market was down two years in a row, and if you remove World War II and the Great Depression, it has only happened three times.   It is certainly possible that it could happen in 2019. However, given current valuations and a relatively healthy economy, we believe the odds are more likely this represents an attractive long-term entry and rebalance point.  

For most of us, the purpose of a strategic financial plan is to help protect us from selling at the wrong time and enable us the discipline to buy opportunistically.  So if you believe, as we do, that capitalism and the free market will continue to work effectively, then “this too shall pass” and we will recover to full health again.

As always, we are grateful for the opportunity to serve your families and businesses together.

Regards and wishes for a healthy and prosperous New Year,

Mitch and Destin