Dear Friends of Pacific Spirit,
We are more delighted than usual to report to you at midyear on the events of the last six months, and on the progress of our long-term journey. But first, as always, a brief review of our principles.
The Ideas That Guide Us
We (you and I) are long-term, goal-focused, planning-driven owners of broadly diversified portfolios of enduringly successful companies. As such, we act continuously on our plan, as opposed to reacting to current events and conditions. We are convinced that the market cannot be consistently timed and that the economy is difficult, if not impossible to consistently forecast – there are just too many unknowable factors. According to economist John Kenneth Galbraith, “The only function of economic forecasting is to make astrology look respectable.” We infer from this that our best opportunity to capture the full long-term return of equities is to ride out their frequent, sometimes significant, but historically always temporary declines – even though they may be painful at the moment.
These will continue to be the bedrock convictions that inform our investment policy, as we pursue your financial goals together.
Current Commentary
The TSX (The Toronto Stock Market), S&P 500 (the blue-chip companies of the USA), and NASDAQ (the technology-heavy market) all ended lower in 2022. As the year turned, it seemed as if the economy was in a no-win situation. Either the central banks would tighten credit conditions enough to stamp out inflation, thereby plunging us into a recession. Or they would relent, avoiding a recession, but permitting the economic cancer of inflation to burn on. In either case, the media was pounding the drumbeat that corporate earnings will decline significantly, boding ill for “the stock market.”
Add to this apparently intractable situation, the first half of 2023 added three new and potentially critical uncertainties: the spectre of US sovereign debt default, a wave of bank failures that seemed to threaten the banking system itself, and a renewed outbreak of fear surrounding the US dollar’s status as the world’s reserve currency.
Yet, after enduring this relentless onslaught of crises, real and imagined – the apocalypses du jour that permeate popular media – the S&P 500 closed out the first half of 2023 up 16.9% and the Toronto Stock Market was up 4.0%. Peter Lynch, the famous manager of the Fidelity Magellan Fund once said, “the real key in making money in stocks is not to get scared out of them.”
The past six months represent a successful investing career in a microcosm. You and I did all that could be asked of us – amid widespread pessimism, we did not get scared out of our investments. Rather we stayed focused on our goals and on our long-term plan, with confidence that the companies that we own are managing our capital with diligence, while always seeking out new opportunities.
We expect at least two more central bank rate hikes followed by a longer period of higher rates – a “higher for longer” outlook. We base this forecast on the supplemental information provided by the US Federal Reserve after each meeting of the rate-setting committee, wherein each member of the committee releases their own outlook for interest rates.
Everyone should wish the Central Banks success in bringing inflation to its knees. High inflation is the bane of a successful retirement plan. Even a difference of 2 percentage points in the rate of inflation over a 25-year (or longer) retirement can be devastating to maintaining a desired retirement lifestyle.
Faith
We would be remiss if we did not speak about faith. First of all, thank you for your faith in us. We recognize that it can, at times, be difficult to entrust your life savings to a third party. We will do our best day in and day out to earn that faith.
The nature of successful investing, as we see it, is the practice of rationality under uncertainty. We’ll never have all the information we want, in terms of what’s about to happen, because we invest in and for an essentially unknowable future. Therefore, we faithfully practice the principles of long-term investing that have most reliably yielded favourable long-term results over time: planning; a rational optimism based on experience, patience, and discipline. These will continue to be the fundamental building blocks of our investment advice in 2023 and beyond.
Also, at times you just need to have faith that the economic system works. If there ever was a time when it seemed logical to sell everything and move to cash, it was in early 2020. Covid was spreading rapidly, the world was shutting down, economic output was declining, everyone was worried for the health of their loved ones, and there was no light at the end of the tunnel. Our future looked bleak. Those who bailed out of their investments in the early days of the pandemic never caught up. They did not have faith that the Federal Reserve would act – in fact, you can identify the exact date the Federal Reserve said it would do everything in its power to support the economy because that was the day the market turned upward. They lost faith in the ingenuity of humanity. We did not know that Pfizer and Moderna would bring forth vaccines as quickly as they did, but faith told us that something – a cure or a workaround – would be found. They also lost faith that companies could adjust on the fly to new realities and that capitalism is the most flexible economic system.
You’ve gotta have faith.
Thank you as always for being our clients, it’s a privilege to serve you.
With every good wish.
Pacific Spirit Investment Management Inc.
John and Dennis
Please feel free to forward this commentary to anyone you feel would benefit from it.
© Pacific Spirit Investment Management Inc, 2023