2021 Midyear Client Letter

As America continued to recover from the COVID-19 pandemic in the first half of 2021, the economy and the equity markets made significant progress.

Our midyear report to you is, as always, divided into two parts. First is a brief recap of our shared investment philosophy; second is our perspective on the current situation. Your partners Frank, Lindsey and Tom welcome your questions and comments.

Principles

• We believe the best measure of success in financial planning and investing is to help our clients achieve their most cherished financial goals and to enjoy the richest lives that they can with the money that they have. Any other benchmarks are ultimately irrelevant by comparison.
• We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless your goals change, we see little reason to alter your financial plan. Your portfolio is calibrated based on how well-suited it is to that plan, so we don't often make significant changes to that, either.
• We do not believe the economy can be consistently forecast, nor the markets consistently timed. We're therefore convinced that the most reliable way to capture the long-term return of equities is to treat temporary declines not as the crises that the media portrays them to be, but as the opportunities that they truly are.
• We believe that an investor that can remain patient and disciplined while others are not has a powerful advantage, and we work to ensure that our clients are mentally prepared so that they can possess this advantage for themselves and their loved ones.

Review and Looking Ahead

The American economy continued its dramatic recovery in the first half of 2021, spurred by the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic, combined with massive monetary and fiscal accommodation. We are reminded again of capitalism's deep fundamental resilience, which ought never to be underestimated.

On July 1, 2020, around the time that we wrote our previous midyear client letter, the MSCI All Country World Index closed at 74.27. As of June 30, 2021 the All-Country World Index closed at 101.19, an increase of 36.25%.

The economy continues to struggle with supply chain imbalances, as well as with a historic mismatch between the number of job openings available and continued high (though rapidly declining) unemployment. The chattering class of pundits and financial journalists continues to speculate on when these blockages will clear; to long-term investors like us, the key is our belief that they will, in the fullness of time.

There is also the issue of the Biden administration's fairly radical tax proposals with respect to capital gains and estates. The best that can be said on this subject is that, as the first half ended, the momentum behind these initiatives seemed to be ebbing. But the political climate remains as hostile to capital (and capitalists) as it has been in quite a while.

Nonetheless, for investors like us, the most important economic report of this whole six-month period came just a few days ago. It was that household net worth in this country spiked 3.8% in the first quarter of 2021—to $136.9 trillion—propelled by broad gains in the equity market and in home prices. Even more important, perhaps, is the fact that the ratio of household debt to assets continued to fall and is now back down to about where it was 50 years ago.

The consumer powers this economy and the consumer has rarely carried more manageable debt levels relative to disposable income—and has simply never been holding more cash—than he/she does today. In June, the National Retail Foundation raised its outlook yet again; it now expects retail sales to grow 10.5% to 13.5% (that is, $4.44 trillion to $4.56 trillion) year over year.

On February 19, 2020—the market's peak just before the pandemic took hold—the S&P 500 closed at 3,386. It then proceeded to decline 34% in 33 days, amid the worst global health crisis in a century. But if you bought the Index at that epic top, and were still holding it on June 30 of this year, your total return with reinvested dividends has been close to 28%. We have never seen—and don't expect to ever see again—a more vivid demonstration of Peter Lynch's dictum that "The real key to making money in stocks is not to get scared out of them."

We believe that we are here for just that reason: to help you not get scared out of them, and in so doing to help you accomplish your most ambitious financial goals.

We are here to align your means with that which means the most to you.

Thank you for being our clients. It is a privilege to serve you.