As I write to you (just after the August long-weekend), stock markets in North America are down around fifteen percent year-to-date and bonds are down (in price) an amazing ten percent. Because we had positioned client portfolios in advance to resist inflation threats and rising interest rates, our typical client portfolio is down less than five percent so far in 2022. This seems to be a year in which the best offense is a good defense. Nevertheless, even at the higher temporary draw down levels experienced by most investors, the present volatility is an acceptable price to pay for owning shares of the profits of great companies. We are happy to let others make rash decisions to sell equities when sentiment is overwhelmingly negative. The only thing that matters to us as lifelong, plan-based investors, is that prime grade common stocks will make new highs sooner or later, as they always have. I encourage you all to trust in what I like to call “Lloyd’s First Law of Investment Dynamics”: Those who own a share of the profits always wind up relatively wealthier over time.
Make no mistake, however, the current environment of high inflation is a burden on all of us. Government banks printed trillions of dollars to finance lock downs during the pandemic, bloating M2 money supply by almost 40% in the process. The pain of rising interest rates, which weigh on asset prices, is a necessary and overdue corrective. I expect that inflation will persist longer than any of us would like. At the very least, wages and salaries need to adjust higher so that workers can feed, house and transport themselves. I expect that to cause a second wave of inflation. I continue to position your portfolio to hold more commodities and less fixed-income in order to resist inflation.
With regard to our investment policy, nothing has changed, because nothing ever changes. That is: we are long-term, goal-focused, plan-driven investors. We own diversified portfolios of superior companies; these companies have demonstrated the ability to increase earnings (and in most cases dividends) over time, thus supporting increases in their value. We act continuously on our financial and investment plan; we do not overreact to current events, no matter how distressing they may be. After 30 months of chaos – the pandemic in its several variants, the U.S. presidential election that would not end, roaring inflation, the supply chain mess, war in Europe and so on – we’re all understandably exhausted. (And I most certainly do mean we.) That’s when the impulse to capitulate – to get to the illusory “safety” of cash – becomes strongest. So that’s when the impulse must be resisted most strongly. And that is a central part of my job as your portfolio manager and financial counselor.
I am proud that we have been able consistently to outperform the market averages. But as I’ve said before, you don’t need me to perform miracles for us to achieve your goals.

Mark Lloyd, Ph.D.

Senior Portfolio Manager