Dear Friends and Family,

Market Declines…After several days of market decline, I am already hearing news that sounds like the fairy tale Chicken Little. In this tale a young chicken is hit by a falling acorn and begins to spread the news “The sky is falling; the sky is Falling”. In the end the chicken is eaten by a fox. Perhaps the moral is to not spread or listen to fake news. Somehow this old tale rings true today.

Market declines come and go almost every year. The biggest risk is not the decline. The fox in this story is the investor hurting themselves by selling out. Common stocks have an enviable record of success despite panics, recessions, depressions, and wars. Even with multiple devastating wars, both German and Japanese stock markets grew only 1% slower in the 20th century than the U.S. markets.

The volatility of the market can test investors patience. I am comforted by a description I heard a while ago; “Volatility is the price investors pay to be successful”. The three richest individuals in the U.S. are Jeff Bezos, Bill Gates, and Warren Buffett. All have one thig in common, which is They never sold any of their company shares simply because the market declined. There is only one question to ask if you are holding a decent portfolio of common stocks. Is the government going to expropriate private businesses without paying a just price? If the answer is no, hold for better markets.

The Boy Scout motto is Be Prepared. The Coast Guard motto is Always Ready. I guess some of both rubbed off on me. When designing the strategies for investing I have always incorporated Safety and Quality as criteria that prepared and readied portfolios for hard times. At the time I was willing to pay the small price I saw to be prepared. It was only 20 years ago when better historical data became available. I discovered, by back testing, Safety and Quality both outperform the market. It was at that time that I also realized that the theory “In order to obtain higher returns you must take higher risk” is just a theory.

I would point out that there have been approaches to reducing volatility in portfolios. Some of these do work. All of them are very expensive reducing returns by 25% to 75%. Adding government bonds for example, works some of the time. However, understand that in the 20th century, common stocks outperformed government bonds by 6% a year after inflation: 7% vs. 1%.

Katz Family Financial