Hello All-

Happy Friday. We started the week with ‘Marathon Monday’ here in Boston, and while the weather wasn’t optimal, 30,000 athletes from more than 100 countries still crossed that finish line. In the photo above, 33-year-old Hellen Obiri is seen breaking the tape at 2 hours, 21 minutes, in only her second marathon race and against the deepest women’s field ever. Wow.

The Boston Marathon is the world’s oldest annual marathon and ranks as one of the world’s most prestigious road racing events. This was the 127^th running, and the 10-year anniversary since the deadly bombing attacks that briefly shook, but then defiantly united our amazing city.

As many of you know, this classic event was the inspiration for the name we ultimately chose for our firm. And it’s no coincidence that our office space is (and will likely always be) symbolically situated at the finish line in Back Bay. In high school and college, I was a long-distance runner (cross country & the 1- and 2-mile event in track), and while now ‘retired’, I’ve run multiple marathons, including Boston twice. Looking back, I still consider these races to be pinnacle achievements of this more athletic period of my life. I’m grateful for those years because they taught me discipline and helped me form good, consistent habits, which I later applied to my professional life as a financial coach.

I see the marathon, particularly the Boston Marathon (as it, specifically, is the ultimate accomplishment for any marathoner/long-distance runner) as the perfect metaphorical embodiment of the work we (you and I) are doing together.

Despite the fact that the equity market hasn’t come anywhere near breaching the lows it made 6 months ago, one could argue that there is still much to be fretful about in terms of global instability. The carnage in Ukraine has continued and may well be intensifying as the situation descends into a grinding proxy war between Russia and the West. An increasingly militant China continues to threaten armed hostilities against Taiwan.

Likewise, the stability of the world’s financial system is more questionable than it has been at any time since the Global Financial Crisis of 2008-2009, rattled by bank failures in the U.S.

The American economy—so critical to that of the world—is still experiencing inflation far above any acceptable level. The Fed has engineered the sharpest rate spike on record, yet the real interest rate remains negative. And the recent unpleasantness in the banking sector makes it that much harder for them to be meaningfully hawkish.

(Still, there are bright spots: negative growth in the M2 money supply for the first extended period since the Volcker Fed stamped out inflation 40 years ago; the dollar stronger than it’s been for most of the last half century; and banks still holding three trillion dollars in reserves, versus precisely zero at the onset of the Global Financial Crisis.)

These and perhaps other incipient crises- the unknown unknowns—may be expected to generate apocalyptic headlines, to which we will be exposed throughout the coming summer. And thereafter, we will begin stumbling toward another bitterly partisan presidential cycle.

In short, as advisors we are proceeding on the assumption that the total chaos of the last three-plus years is not abating, and that bigger and even nastier surprises can’t be ruled out at this point. Or indeed at any point. So let me again pound away at the world of difference that exists between the relentless long-term success of the great mainstream companies and that, to quote Nick Murray “hissing, writhing bag of snakes known as ‘the stock market’”. Simply stated, successful lifetime equity investing requires us to steadfastly persist in the former, and to tune out the latter. The distinction should be expressed as follows:

History is surely an extremely powerful argument for the enduring success of U.S. equities. But it pales in comparison to an even more compelling idea, based on nothing less than pure logic. A rational business enterprise, failing to earn a superior return, will stop whatever it’s doing, and/or change what it’s doing, and/or liquidate. And in a portfolio of hundreds of rational businesses, one that fails from time to time will disappear, to be replaced by yet another rational business that is performing relatively well. If a company produces substandard profits for a long enough time, it will cease to exist. But however it eventuates, rational companies will stop deploying their capital in suboptimal ways. That is, a rational board of directors will realize whatever capital can be salvaged from a laggard and even failing company and deploy that capital in some more profitable way—or sell the company to someone who can. Shareholder capitalism is, in a sense, one of the most positive forces on earth, in that it simply will not go on wasting capital on enterprises that aren’t sufficiently profitable.

If a product line is not earning an adequate return—if, for example, its production costs have risen sharply with inflation—the managers will raise prices to restore acceptable profit margins. If they find that the consumer won’t pay the higher price, they’ll innovate, or automate—competition being the ultimate spur to productivity. Or they’ll stop making the product altogether, and sell the facilities to another company who thinks it can do better. Rational capital is always migrating toward it’s long-term return in the marketplace (~10% per year, these last hundred years).

How does the investing public—even the more affluent investor who goes to work at a rational business every day—manage to miss this? Of course: they don’t think in terms of companies that have rational strategies for preserving and enhancing their capital via profit maximization over the long-term. They think in terms of ‘stocks’ and ‘how volatile the stock market is.’

That’s the human tragedy. It is almost effortlessly possible, if history is any guide at all, to compound one’s capital at a rate far in excess of inflation (three times more over this last century) by investing in broadly diversified ownership of successful companies. But that’s a radically different psychological exercise than ‘investing in the stock market’.

The capacity to make that distinction—and to persist in it through all the crises and all the manias of an investing lifetime—is simply not available to unaided human nature. Which is why you have me. 😉

In this increasingly dangerous world—one in which the ‘stock market’ could temporarily go down 50% at any moment for any reason—my job is to enforce the aforementioned distinction. It is to insist that people focus on the long-term rationality of the businesses they own, and tune out both the macroeconomy and (especially) the utter randomness of stock prices. It is to understand that the safest place we can invest our core long-term capital is in the ownership of the most successful companies, taken together.

Speaking of ‘the stock market’—as I have been assiduously trying not to do so far—has it occurred to anyone to ponder why in the world it has not gone down, the way it was ‘supposed to’? The increasingly dangerous world we’ve been talking about has put on quite a horrific show this first quarter of 2023, for all the reasons cited above, and more. The most avidly quoted soothsayers these past 90 days have been confidently predicting one last crash to new lows, driven by a significant cratering of corporate earnings. And I suppose they may yet be right.

But the S&P 500 came into the year around 3,840, and since then, there’ve been any number of pretty significant negative developments. Yet as I write, it sits at 4,131, around ~7.5% higher.

It’s still early, but so far this earnings season, nearly 77% of companies have beaten analyst estimates, according to FactSet. JP Morgan knocked the cover off the ball, with a blockbuster 52% increase in profits.

Granted, overall, earnings estimates are somewhat lower than they were three months ago; they’d have had to be. But if full-year earnings are going to ‘plunge’ as Morgan Stanley’s team persists in estimating, a whole lot of things need to start going really wrong really soon. Again: could happen, but to me, holding any meaningful part of one’s core capital in cash, waiting for said ‘last leg down’ remains a high-risk strategy.

We believe the odds favor that we are in a new bull market, not a bear market rally. We will continue to remain fully invested and focused on finding relative value within the equity and fixed-income universe. While the atmosphere does not feel full “risk-on” right now, it also didn’t feel that way at the beginning of the COVID recovery nor the end of the Great Financial Crisis. Rather than guess at what the next bearish macro narrative will be, we find the only prudent thing to do is to stick to each client’s pre-defined asset allocation that leads to the best chance of their retirement success. This means remaining fully invested.

Below you’ll find an assortment of articles and other resources, which I have sorted between ‘planning’ and ‘market’. But first, two bullet points—one more of a ‘housekeeping’ item, and another a rule of thumb to share given the volume of Roth-related questions we’ve been getting lately.

Planning:

Market:

Have a great weekend.

Charlie

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

John Bay, CFA | Chief Market Strategist | jbay@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com