Beginning this year, we plan to publish these twice annually—in January and July—to keep you informed and engaged. Each essay will highlight the foundational principles that guide our approach to wealth management—the core beliefs shaping our investment policy. In addition, you'll find a brief, measured perspective on the current economic and financial landscape, presented with the goal of providing clarity and calm amid the noise.
I'm happy to report on another very successful year in our plan for the pursuit of your most cherished financial goals. Our plan, and therefore your portfolio, continue to be driven by these goals, rather than by any prognostication around the economy or the markets. That will always be the case, throughout the coming year, and beyond.
I'll start by restating some of the core beliefs that guide our planning and investment approach and then offer a few comments about the economic/financial backdrop.
General Principles of Wealth Management
- We are long-term, goal-focused, plan-driven investors. Our core investment policy is to pursue your goals by investing in broadly diversified portfolios of quality equities.
- We believe that the economy cannot be consistently forecast, nor the markets consistently timed. Moreover, we find no predictable pattern in the way markets react to—or choose to ignore—economic developments.
- We conclude from these beliefs that the only way to be reasonably confident of capturing the full premium return of equities is to ride out their frequent, sometimes significant, but historically always temporary declines.
- We do not react to, much less try to anticipate, economic and/or market events. As long as your long-term goals remain unchanged, so will our plan for their achievement. And as long as our plan remains constant, (except for annual rebalancing) so will your portfolio.
- We believe that long-term compounding of quality equities is the most important force guiding us toward the achievement of your goals. And we're obedient to the late Charlie Munger's dictum, “The first law of compounding is to never interrupt it unnecessarily.”
Current Commentary
- In 2025, the broad equity market completed its third straight year of double-digit returns, driven by a strong economy and significantly increased corporate earnings. The S&P 500 ended the year up 17.9% (FactSet). This after realizing, on an intraday basis, a low of -21% on April 7th (FactSet).
- The average intra-year decline in the S&P 500 since 1980 is 14.2%. 2025 was no exception with an intra year decline of 19% (Standard & Poor's). Those who sold on April 7th missed a 37% increase in the value of their portfolio.
- The consensus of analysts' forecasts is for even stronger earnings gains approaching 15% in each of 2026 and 2027 (source: Yardeni Research).
- Somewhat remarkably, profit margins have continued to expand—to 13.1% in the third quarter of 2025, the highest in 15 years (source FactSet). One would have thought that inflation in companies' costs colliding with a straightened consumer's resistance to price increases would have been a significant headwind here. So far, at least, one would have been quite wrong.
- The single important weak spot has been the employment picture, which has continued to soften. But even this has its significant bright side: strong economic growth and a relatively flat employment situation mean that per capita productivity has been rising strongly. Unemployment may have recently ticked up to 4.7%, but the other 95%-plus of the workforce is producing a significant increase in products/services per hour; that allows companies to raise wages without triggering inflation.
- After six straight rate cuts, Federal Reserve monetary policy is 175 basis points (1.75%) looser than it was a year ago, even with sticky CPI inflation still pushing three percent. It seems more than reasonable to expect the lagged effects of all this easing to begin showing up in 2026.
- The middle class in particular is set to enjoy tax refunds this filing season which have been variously estimated around $150 billion, or half a percentage point bump in GDP. The main engines of this are a higher standard deduction and (especially) a temporary restoration of the SALT (state and local tax) tax deduction cap to $40,000 from $10,000. This would seem to be a potentially meaningful near-term economic tailwind.
- It would not surprise us in the least if much or most of the above salutary data comes as news to you—except, of course, the part about the softening labor market, which media outlets have trumpeted to the skies. In our opinion, there's good information in this for us. To wit, the economic/financial “news” we receive tends to skew overwhelmingly negative by conscious design. Good news is boring.
- The fact remains that a very strong rising equity market may (and indeed should) have taken this data into account—and maybe then some. Thus, the burning question all year long was “Are we in an AI bubble?” This replaced the previous year's burning question “When and by how much will the Fed cut rates?” Which in turn replaced 2023's “Will there be a recession?” And let's not forget April 2025's “Will tariffs destroy the world economy?”
- There was no recession and tariffs have not destroyed the world's economy but that's beside the point. Which is that the universal burning question is usually, if not always the wrong question, and a distraction to the well diversified long-term investor—like us.
- There can be no question that the broad equity market is more heavily concentrated in a few huge tech stocks—which can't all win the AI race—than it's ever been in our investing lifetimes. And that this concentration has the Index selling at a price/earnings multiple in the neighborhood of its historic peaks.
- Our response to this is twofold: (a) Valuation is not, never was and never will be an effective market timing tool. And (b) your imminent portfolio rebalancing will address this issue forcefully.
- All of this suggests to us that the next significant market shock—and there always is one; they come along with almost the frequency of the crosstown bus—will probably come out of deep left field (in the jargon, an unknown unknown, as opposed to a known unknown like valuation or the national debt). And like all of the shocks of the past, and all those yet to come, it will have very little to do with us, other than as a potential bargain-hunting exercise.
- We are following a plan that has always “worked” in the very long run, in that it has ultimately achieved the goals of investors like us. We do not accept that “this time is different” regardless of what “this” may be at any given moment. And thus we don't adjust our strategy to accommodate the fads or fears of that moment. We don't go to cash during market panics, and we don't bet the ranch on “new era” miracles…like AI. We remain hyper vigilant, prepared and eternally optimistic.
We wish all our friends and clients—because to us you're the same thing—a healthy, happy and prosperous 2026. We're always here to address your questions and concerns. Thank you for being our clients. It is an absolute privilege to serve you.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.