"We Planned for This." Sample 2025
November 2024
As you'll see in the mid-November replay of our live event in New York, I introduced a fair amount of new material regarding ways we can help investors become increasingly resilient in the face of market declines. One specific tactic is developing our ability to say, with a great deal of conviction, “We planned for this.”
We are in the business of formulating essentially lifelong investment plans for clients, based on historical returns. For the S&P 500, this assumes an average compound annual return around 10% (or about seven percent net of inflation, which for the last hundred years has amounted to the same thing).
Clients are generally disposed to regard our plan as “working” when the market is delivering positive returns. But when the market declines, they too often default to the assumption that our plan has stopped working, or even that it has been rendered invalid by current events. (Hence their deathless cry of “This time it's different.”)
Caught up in our own anxiety surrounding the apocalypse du jour, we may miss the opportunity to drive home to clients one hugely fundamental fact. Namely that the 10% return of the post-WWII period included an average 30% drawdown on an average of about every five years in the interim. Thus, since our assumptions are only that mainstream equities will continue to do essentially what they have been doing over time, we can warmly say when the market declines meaningfully, “In a very real sense we planned for this.”
You can be sure that the client will immediately protest that the economic/financial/geopolitical details of the current crisis are radically different from all the previous disasters. Well, of course they are, and we gladly stipulate to that undeniable fact.
Every crisis capable of peeling a third off the prices of America's greatest companies is starkly different from all the others. Moreover, it's the shock of that difference that generates the panic response. A horrendous inflation spike in 2022 (S&P 500 down 25%) was very different from COVID (down 34% in 33 days), which was totally different from the Global Financial Crisis (down 57%), which was entirely different from the dot-com implosion and the accounting scandals (down 49%). And that's all well within a quarter century!
But $100,000 invested at the peak of the dot-com mania in 2000—moments before the foregoing litany of horror began—had compounded to $600,000 by this September. “This time it's different” didn't actually tell the investor anything useful. Worse, it blinded him to the realization that there must have been something much more important—and inexpressibly more powerful—going on throughout this entire period.
That something was, of course, the staggering fundamental strength and resilience of the great American companies, expressed in their seemingly limitless capacity to innovate, to increase their earnings and to raise their dividends. Again, in the bubble year 1999, just before all the lights went out, the S&P 500 earned $51.68 and paid $16.69 in dividends. Four savage bear markets later, the consensus estimates for this year are around $240 and $76, respectively, with further significant increases forecast for 2025. How do people not get this?
This is anything but a rhetorical question. And the answer, of course, is that they see themselves as invested in “stocks” as distinct from—indeed, as opposed to—companies. They then compound that fatal error by assuming that their “stocks” are only worth whatever panic-crazed prices “the stock market” puts on them on any given day. That's how panic feeds on itself, until in an orgy of capitulation it burns itself out—and the permanent upward march of the companies' values resumes.
If people saw themselves as what they're supposed to be—patient, disciplined, long-term owners of consistently successful companies—they would realize that “the stock market” at extremes of investor pessimism becomes in fact totally disconnected from the enduring value of the companies. (That the truth, in other words, becomes the opposite of the news.)
When the S&P 500 went down 34% in 33 days during the onset of COVID, did anybody stop and think: “Do I really believe that the enduring value of companies like Apple, Netflix, Walmart, JP Morgan Chase and Caterpillar have been permanently impaired by a third?” I doubt it. They more probably thought, “My stocks are down by a third in the worst public health crisis in a century, the world economy is closing down, there's no end in sight, and I have to get out before I'm down two thirds.”
As we've so often said in these pages: Even the most stoical long-term investors in great companies felt that fear. (As, if we're honest about it, did you and I.) The critical difference was that we—and, with our help, they—declined to act on that fear. Instead we allowed all of history and logic to remind us that even at that all-is-lost moment, when the prices of their stocks were crashing, the great companies were working through the problem.
(However anecdotally, you can quickly test this thesis: Look at where the stocks of the five companies randomly cited above bottomed in March 2020, and where they are now. Or just look at the Index, which troughed on March 23, 2020 at 2,237 and as I write is pushing 5,700. They don't call them “the great companies” for nothing.)
In summary, then: from the very first moment we propose a long-term plan/portfolio to a client, we must make it unmistakably clear that every bit as much as we assume mainstream equities' historical return, we assume the historical depth and frequency of their temporary stock price declines. Specifically, we fully expect the onset of an average decline of perhaps a third or so, on an average of about every five years.
The permanent (and to the investor, effortless) advance of earnings, dividends and values can never be separated from those temporary declines. Indeed, equities' premium return is only available to the investor who rides out the declines, since the economy can't be consistently forecast, nor the market consistently timed.
In just that sense, when a significant decline strikes, we are able to assert with fierce conviction, “We planned for this.”