Annual Letter

I wanted to reach out, as I always do this time of year, to recap where we’ve been over the last couple of years and to reinforce our core investment principles.  The story of the last two years is simple:

In 2022, the Dow, the S&P 500, and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25%, and 35% respectively.  A week before Christmas 2023, all three were setting new all-time highs when we include reinvested dividends.

In other words, we had a major downturn in the stock market over most of one year, and those significant declines were entirely erased in the following year.  This cycle was about six months faster than normal, but in the most important sense, this is how it always works.  

As always, I will break this year-end letter into two parts: first, the timeless principles these last two years served to reinforce, then a discussion of our current conditions.

General Principles:

• The economy and the markets cannot be consistently forecast or timed.  Therefore, we believe the investment strategy with the best chance of capturing the long-term returns which stocks generate is to remain invested all the time.
• We are long-term, serious owners of real businesses, as opposed to speculators on the short-term gyrations of the stock market (or, God forbid, gamblers on whatever hot idea is popular at the moment – “flipping” houses, cryptocurrencies, “alternatives”, NFTs, beanie babies, etc.)
• Stock market drops, though frequent and often dramatic, have always been completely overcome, as the companies we invest in consistently continue to innovate.
• Long-term investment success most reliably comes from making a plan and sticking to it.
• An investment strategy based on anticipating (or reacting to) current financial, or political events/trends depends on being able to consistently predict the future accurately and inevitably fails in the long run.

Current Commentary:

• I believe the long-term disruptions and distortions from the COVID pandemic are still working themselves out in our world in ways that can’t be predicted, much less turned into any kind of coherent investment strategy.
• The most important financial event in response to COVID was the 40% explosion in the M2 money supply by the Federal Reserve.  It predictably ignited a firestorm of inflation.
• To stamp out that inflation, the Fed hiked interest rates faster than any other time in its 110-year history.  Both the stock and bond markets cratered in response.
• Despite this, economic activity, in just about every sector but housing, remained strong and unemployment has, at least so far, been largely unaffected.
• Inflation has come down significantly, though not yet close to the Fed’s 2% target.  But prices for most goods and nearly all services remain elevated, putting a strain on middle class budgets.
• Markets have recovered significantly and now the concern seems to be whether or not the Fed will drop interest rates in 2024 and if we’ll be able to avoid a recession.  Ultimately, no one knows these answers, even the Fed itself, and there is no way to use them to build any kind of rational, long-term investment strategy anyway.
• Our country still faces big problems with no easy solutions.  The US federal deficit and the national debt continue to go the wrong direction.  Social Security and Medicare keep marching toward eventual insolvency unless reformed.  Neither side of the political aisle seems capable of, or even interested in, reducing government spending in any meaningful way which leads inevitably to more reruns of the every-so-often debt ceiling “crisis.”  And, of course, we will hold a bitterly partisan presidential election at the end of the year.  The markets will face significant challenges in 2024 – as they do every year.

My overall recommendations to you are essentially what they were two years ago at this time, and what they’ve always been.  As we meet to review your most important long-term financial goals, if we find that those goals haven’t changed, I’ll recommend sticking with our current plan.  And if our plan isn’t changing, there’ll probably be no compelling reason to materially change your portfolio.

Housekeeping Items:

As you know, we have designed our service offering for a specific type of family.  We work best with people:

• Who are interested in building multi-generational wealth rather than trying to have the check to the undertaker bounce,
• Who are willing to trust us to manage their entire portfolio rather than putting us into a destructive horse race with other advisors where everyone’s incentive is to focus on short term returns rather than the long-term achievement of your most important financial goals, and
• Who see us as a guide that can help them reach their financial goals rather than some kind of stock picker trying to outguess and outsmart the markets.

Over the last few years, you and our other clients, have been kind enough to recommend Tumwater to your friends and family so much that we just can’t keep up with the demand.  We’ve now come to the point that, going forward, we need to require a minimum of at least $1,000,000 of assets for us to manage for new client relationships.  In addition, we need to restrict new clients to just 1-2 per month and a waitlist beyond that.  We want to grow, but not at the expense of the quality of service we provide to you, our existing clients, who have gotten us to this point.

A few key points on this change:

1. Thank you!  I never believed I would be in the position of needing to restrict how many clients we take on and it has only happened because of your support and your willingness to recommend Tumwater to your friends and family.  I truly cannot adequately express my gratitude for your support.
2. We are working to build multi-generational wealth for our clients.  To that end, this new minimum will not apply to your family members.  We need to impose it on completely new families but we are committed to serving your entire family, to the extent they want to work with us, and therefore we will not apply this minimum to any member of your family.
3. We appreciate your recommendations to your friends as well and hope that you’ll continue to send them our way.  If we find that one of your friends does not have enough assets to qualify for our minimum we will happily introduce them to other good advisors we know that aren’t facing the same capacity constraints we are.
4. We continue to add staff members, including additional advisors, and we hope to eventually be able to reduce this minimum at some point in the future.

As always, let me know what questions this sparks.  Thank you again for the opportunity to serve you, your family, and your friends.  Here’s to a great 2024 for all of us!