For Current and Prospective Client Use

Dear Clients and Friends,

We’ve been enjoying one of the longest and most powerful US bull markets on record. From March 2009 through April 2019, US stocks (the S&P 500 Index) quadrupled, turning every $1 investment into $4. But are the good times coming to an end? In recent days, the global stock markets have been spooked by the escalating trade conflict between the world’s two largest economies, the US and China. As I write this letter, while the trade dispute may yet be settled amicably and the news seems to change every day, a quick resolution probably isn’t in the offing. (In fact, each side has announced higher tariffs on the other’s imports.) So in just a little over a week, we have transitioned from trade-news excitement to trade-news anxiety.

The market hasn’t taken this turn well. Volatility was already up after the Federal Reserve failed to endorse an interest-rate cut on May 1, even while Washington and Beijing were hinting that a trade deal was imminent. Once the negotiations collapsed in acrimony (a nice example of the Chinese proverb “same bed, different dreams”), volatility spiked. Altogether, between May 1 and May 17, the S&P Index dropped about 3%.

The dispute with China isn’t the only global hot spot. Brexit remains a question mark. Tension between the US and Iran is escalating. Venezuela continues to fall apart. Despite these headwinds, though, asset prices remain broadly elevated worldwide, in part due to “artificial support” from central banks such as the Federal Reserve in the form of loose monetary policy (keeping interest rates low). And so in my view, investor confidence, not asset value, has been the primary force propping up security prices. How long might that confidence last? That’s the context for this letter about what’s going on around the world and how we may make some sense of it.

The Turnaround This YearThe great bull market notwithstanding, if you were an investor in 2018 your portfolio lost money for the year: Cash was the best performer, beating both stocks and bonds for the first time since 1994. Virtually every asset class declined in value. The S&P 500’s -4.4% return marked the end of nine consecutive years of positive annual returns (the only nine-year stretch since 1926, except for 1991 through 1999). Volatility soared in the fourth quarter of 2018, and on Christmas Eve the S&P 500 was off virtually 20% from its all-time high (posted just three months earlier), a hair below the technical criteria for a “bear market.” As far as I’m concerned, it was a bear market. But a small one…

The carnage late last year was particularly notable in high-flying tech stocks, including the so-called FAANGs. Apple slumped 38% from its high; Netflix plunged 44%; and Amazon fell 30%, shedding a remarkable $337 billion in market value – equivalent to the current value of 60 New York Times Cos. Google recently lost 10% ($90 billion of market cap) in a matter of days due to slowing ad sales. All of this was a stark reminder of how vulnerable the market’s tech darlings can be. And there was no refuge abroad. Indeed, foreign stocks performed much worse than their US counterparts in 2018: The MSCI EAFE Index of developed markets slumped 14%, and the Shanghai composite index plummeted 25%.

Then, just when it seemed as if the nine-year bull market had come to a shuddering halt, sentiment abruptly turned. The 16% rebound in world stocks (the MSCI All Country World Index) from January through April of this year was a refreshing change from 2018. And the good news wasn’t only in stocks. While the returns of eight of the most important asset classes we track ranged from flat to negative 15% last year, six of those asset classes showed double-digit gains, and none lost money.

A Letter from Gregg Fisher, CFAFounder, Portfolio Manager & Head of Research

SPRING 2019

A Letter from Gregg Fisher, CFA: Spring 2019 2

It is always difficult to pinpoint the proximate causes of a sharp market turn (even with the benefit of hindsight), but one key factor for the resurgence in 2019 appears to have been a dramatically dovish shift in US Federal Reserve monetary policy. Acknowledging soft inflation and slower economic growth both in the US and around the globe, the Fed announced (and reaffirmed after its May 1 meeting) that it was putting interest-rate increases on hold this year and would end its balance-sheet contraction by the fourth quarter of 2019. The financial markets, from stocks and bonds to commodities and real estate, loved this unexpected shift away from a monetary-tightening bias.

But is it too soon to celebrate? After all, a hot January-through-April was followed by a chilly May (so far.) Let me begin my comments about evaluating short-term returns by first digging into the turbulence we saw last year.

2018 Bear Market Not a SurpriseAs to the market swoon in the fourth quarter of last year: First, the decline should not have taken investors by surprise. Our research tells us that since World War II, there has been a bear market (a decline of 20% or more) every 2.3 years on average. The decade after 2008 was an exceptionally long period of relatively calm market conditions (again, I credit remarkably loose monetary policies around the globe). Broadly speaking, these were glorious years for stocks, bonds, and real estate; as the painful memories of the Great Financial Crisis slowly faded, investors grew more complacent and more willing to take on risk. But the complacency couldn’t, and didn’t, last forever. In fact, the brief bear market we saw at the end of 2018 was pretty much par for the course: In 2011, US stocks fell 19.4% in five months, and in 1998 they slumped 19.3% in six weeks!

Investors who reacted emotionally to market movements by selling assets in last year’s final quarter were humbled when they missed the sharp rebound in 2019 (just as they were after they sold in early 2009 near the market bottom). Volatility and each downturn create the illusion of danger, but that’s the exact environment that spells opportunities for investors who can hold their emotions in check and think analytically. In fact, one of my responsibilities and challenges as a portfolio manager is to keep my investors and myself focused on the long-term picture. Investors who abandon their strategies during periods of market turmoil risk turning an illusion of danger into real danger by making temporary losses permanent in their portfolios. When times get tough, I like to keep a picture in my mind of the long-term rise of stocks and the success of companies that are driven by creativity, innovation, and hard work. (As an entrepreneur myself, I have always felt, every morning, that my day’s task is to create value – for my clients, my colleagues, and my company.) Remember – up to now at least, companies in aggregate have always rebounded from difficult markets and grown in value; the volatility of their stock prices (in sum) has been far greater than that of their underlying businesses.

This discrepancy between daily market price and intrinsic value (the same applies to the distinction between private and public equity, which I will discuss below) reminds me of a long-time client who, in 1995, asserted that his best investment was his home. When I asked him what he meant, he replied that unlike his stock portfolio, his home came with no monthly statements of its value for 30 years. (If it had, he might have sold his home 30 times.) In other words, he derived emotional comfort from not constantly being faced with valuation issues. Not that the absence of regular valuation statements meant that the value of his home was stable. It wasn’t, of course, but he didn’t have to confront the volatility on a daily basis. The lack of daily pricing on his home was for him, and most homeowners, a strong positive.

Though I knew my client’s statement was at least partly tongue-in-cheek, as a reality check I did some research and found a study by the San Francisco Fed that compared annual returns (after inflation) for US stocks versus houses from 1870 through 2015. It turned out that the stocks returned 8.5% annualized over that time period compared to just 6.1% for houses. (Globally, though, home price appreciation edged out stocks 6.9% to 6.7%, respectively.)

A Letter from Gregg Fisher, CFA: Spring 2019 3

Short-Term Results Unreliable So stocks have been a strong investment over time. As for the handsome market gains of earlier this year, though I will gladly accept them, I would caution investors not to read too much into them. Just as it is not uncommon for large gains to occur after sharp declines, excess returns tend to be mediocre after large run-ups. In addition, high past returns are associated with a higher probability of a market slump: We studied all five-year rolling periods back to 1927 and found that the median five-year return just prior to a 12-month market decline of 30% or more was 11.6%, nearly a percentage point higher than the average five-year return. Perhaps it warrants watching that the current five-year annualized return (as of May 17, 2019) is a relatively elevated 11% – and in fact, the market has been skittish in recent days. But neither the red-letter returns of January through April this year nor the volatility in May should be the focus of investors’ thoughts.

Unfortunately, however, due to behavioral bias, investors do tend to extrapolate recent events into the future. Don’t do it. From day to day, month to month, past returns tell us nothing about what’s to come, and anyone who thinks he or she can predict whether a downturn will continue or a good month will be repeated is likely to guess wrong and undermine the long-term benefits of investing. (For more on the challenge of market timing, see my recent article at https://gersteinfisher.com/viewpoints/does-market-timing-work/.) It is counterintuitive (and emotionally difficult), but wise, to be cautious when the market is soaring and to be hopeful when securities go on sale. This is easy to say, but hard to do; it’s not what we know that counts, but what we do with what we know.

Yellow Lights Flashing: Rising Global Debt…Returning to the current markets, I’d caution that maintaining today’s elevated valuations will depend on continued investor confidence, which can turn on a dime. I make no economic or market forecasts (I have learned that I am not particularly good at predicting the future), but I do note that the global economy is slowing and that our economic expansion, which is 9½ years old, is aging. One of my principal concerns is the enormous increase we’re seeing in debt worldwide, which leaves governments with limited room to maneuver in case of a crisis (or a recession). And sooner or later, a day of reckoning will come. A friend recently reminded me of an old saying: “Debt doesn’t matter until it does – and then it matters terribly!”

In the wake of the 2008 crisis, central banks slashed interest rates (more than $14 trillion of the world’s sovereign debt currently offers negative interest rates, according to IMF figures) and spurred liquidity through aggressive quantitative-easing policies. Total global debt nearly doubled, to $243 trillion, as of the end of 2018 (Source: Institute of International Finance). That figure was equivalent to almost 300% of global GDP. The global economy and financial system may now be “hooked” on super-low rates (even modest Fed tightening last year probably helped trigger the fourth-quarter selloff) – rates that foster an illusion of low financial and economic risk. Central banks must now also contend with rising nationalism and populism – which challenge their independence from political manipulation – together with the slowing global economic growth and a threat of rising inflation. That threat is increased by tariffs and other forms of trade barriers, which have a whiff of stagflation about them.

The seeds of the next financial crisis may well be found in today’s levels of sovereign debt. Heavily indebted, too-big-to-fail and too-big-to-save (yes, both) Italy – which accounts for 16% of the Eurozone economy – is one potential trigger, as the country’s relationship with the European Union frays. Here in the US, government debt as a percentage of GDP has jumped from 74% in 2008 to above 100% today (Source: Gerstein Fisher Research; Bloomberg). And partly owing to rising budget deficits, our national debt just reached $22 trillion, which doesn’t even account for the tens of trillions of dollars of unfunded liabilities from “entitlement” programs.

Whether it is Uncle Sam, corporations, or households, Americans are not saving and investing enough. One glaring trouble spot is the shortfall so many people are facing in funding their retirements, particularly in light of increasing longevity. Nobel laureate Robert Merton discussed the looming retirement-funding crisis during a recent “Q Factor” podcast with me (you can listen to the podcast at https://gersteinfisher.com/podcasts/robert-merton-a-data-visionary-senses-a-coming-crisis/). Incidentally, since a large percentage of retired Americans have limited savings apart from their home equity, Merton maintains that many will be able to fund retirement

A Letter from Gregg Fisher, CFA: Spring 2019 4

only by relying on risky strategies such as reverse mortgages. In addition, due to the current high valuations of both stocks and bonds, pension-fund managers and individual investors alike will struggle (and take more risk) to earn a target return of, say, 7.5%, as demonstrated in Exhibit 1.

Exhibit 1: You Need to Take More Risk Today to See the Same Level of Return Risk Required to Earn an Expected 7.5% Annually

Sources: Callan, Gerstein Fisher Research

As the exhibit illustrates, in 1989, due to interest rates much higher than today’s, an investor could have achieved a 7.5% annualized return with a very low-risk cash and fixed-income portfolio. Fifteen years later, in 2004, an investor would need to allocate half of the portfolio to stocks and accept three times the volatility to achieve the same 7.5% return. Finally, today, an investor needs to keep 96% of the portfolio in stocks, with six times the expected volatility of the 1989 portfolio, to target a 7.5% expected return. Taking on more risk in pursuit of higher returns may not be a good idea for many investors. Some may have no alternative.

And so companies, investors, and households (particularly students) have levered up. To cite a few examples: The lowest-rated investment-grade bonds (triple-B) have zoomed to nearly 60% of the corporate-fixed-income market. The leveraged-loan market, a key funding source for lower-quality issuers, has been on a tear, as investors reach for yield in a low-interest world. Student debt has more than tripled since 2006, to $1.6 trillion, according to Fed data, and is now the second-largest category of consumer loans after mortgages. Recent college-campus visits with my son Josh have made me more acutely aware of the financial burdens we are placing on young Americans. Many may find themselves behind the eight ball: The government has all sorts of tactics at its disposal to collect delinquent loan payments, including garnishing wages and in some states, revoking professional licenses and even drivers’ licenses (Source: Bloomberg News).

The question is, how long can Americans live beyond their means without paying a price for it? Not surprisingly, the upward debt spiral has come during a period of super-low interest rates, an expanding economy, and a robust job market (though gains in personal incomes have been muted). What happens when rates rise – which in itself tends to slow the economy by raising borrowing costs for businesses and consumers – or an inevitable economic downturn arrives? By their nature, investors (and borrowers) become complacent in beneficent times, projecting their recent positive experience (i.e., low rates and volatility) into the future and assuming (dangerously) that the good days will roll on. Mind you, I’m not necessarily predicting a debt apocalypse, but history tells us that periods of elevated debt levels don’t usually end well. So I’m just advising some cautious monitoring in the period ahead.

Period

Return

Risk

1989

7.5%

3.1%

2019

7.5%

18.0%

Cash75%

US Fixed Income

25%

2004

7.5%

8.9%

GlobalStocks18%

Small/Mid Cap

US Stocks6%

Large Cap US Stocks

26%

US Fixed Income

50%

GlobalStocks24%

Small/Mid Cap

US Stocks8%

RealEstate14%

PrivateEquity16%

Large Cap US Stocks

34%

US FixedIncome

4%

A Letter from Gregg Fisher, CFA: Spring 2019 5

…And Some Risky Market TrendsAlong with rising leverage and the years of artificial support from central banks, I am concerned about some structural trends in the US market. The number of publicly traded US securities has halved over the past 20 years, according to our research (based on data from Bloomberg and Cambridge Associates), whereas newly listed securities are growing in China and in other overseas markets. It’s no coincidence that private-equity assets have multiplied during the same time frame (is private replacing public equity in the US?). PE funds (formerly seen mostly as portfolio diversifiers) have gobbled up many publicly traded companies, increasing the correlations – and blurring the distinctions – between the public and private markets.

Even before this trend took hold, if you placed the word “private” in front of “equity,” it was still equity; if you put the word “public” in front of “real estate,” it was still real estate. Now, though, the price that private-equity investors seem willing to pay for small companies appears to be higher than on public markets, so there may be more incentive for private businesses to sell themselves to PE funds than to list on a public market. Combining a $1 trillion cash hoard (Source: Preqin Private Equity Online) with leverage, PE funds may do another $3 trillion of shopping – a good chunk of it abroad – for businesses, both public and private. Is this a problem? Yes and no. It is helping vitalize the investment markets, but the diversion of so much capital into the less-transparent, riskier PE landscape can spell some trouble ahead for investors. Plus, the high valuations of many private-equity securities may bode ill for their future returns: Even good investments can become bad if you pay too much for them.

Another market concern for me is the dizzying rise of indexing. From 2009 to the end of 2018, the amount of assets in exchange-traded funds (ETFs, many of which are indexed) multiplied 4.5-fold to $3.4 trillion (Source: Investment Company Institute). When I started in the investment business in 1992, ETFs didn’t even exist and there were but a handful of significant index funds. In a November 2018 article in The Wall Street Journal, the late Jack Bogle (index-investing pioneer and founder of The Vanguard Group) tells us that US-equity index funds now comprise almost 20% of the total US stock market capitalization (our research shows this figure as even higher). Bogle sees index funds probably comprising 50% of the market eventually. But even the great spokesman for indexing balked at some of the consequences of this trend. For example, domination of the stock market by indexers could lead, Bogle feared, to a dangerous diminution in corporate governance, since there would be fewer market participants policing corporate executives. I’d also add that in some small-cap ETFs, the underlying securities have poor liquidity and are traded much less frequently than the ETFs themselves: another source of potential risk.

Probably most important, index trading is not value-oriented, but rather is driven by flows of money and market perceptions. (I am working on a research paper with Fairfield University Finance Professor Michael McDonald that will demonstrate that pure indexing is a suboptimal investment strategy.) The impulse to index reminds me of a quip by the great British economist John Maynard Keynes: “Worldly wisdom teaches,” he said, “that it is better for reputation to fail conventionally than to succeed unconventionally.” Put another way, be careful about going out on a limb: Market participants don’t yet fully comprehend the implications or risks of the indexing revolution for market liquidity or corporate governance. It’s something we’re studying carefully.

China Ascendant? (Probably)As a portfolio manager and manager of risk, I must also pay attention to geopolitical developments. Movements at the extremes of the political spectrum are sprouting around the world (and sometimes winning elections). Harvard Business School’s David Moss (with whom I have had the good fortune to collaborate) joined us two years ago to speak about the fraying faith in democracy. Politicians have been putting their self-interest and party ahead of Constitution and country. As a steward of your capital, I am conscious that widening social divides – which surely will be a core issue in the 2020 elections – pose a risk to our economy and political system.

A Letter from Gregg Fisher, CFA: Spring 2019 6

Globally, we have entered a delicate transition period for some of the great powers. For example, China is now in the process of asserting its global-superpower ambitions. (Its rapidly expanding navy is one example of the country’s increasing ability to exert power far beyond its borders.) We seem to be transitioning from a unipolar US-dominated world to a multi-polar one. Unfortunately, as described by Harvard political scientist Graham Allison in Destined for War: Can America and China Escape Thucydides’s Trap?, when a rising power historically has moved to displace an incumbent, the transition was seldom peaceful. In the words of Prussian military theorist Carl von Clausewitz, “War is the continuation of politics by other means.” We hope for a happy ending in the current global dislocations, but we shouldn’t underestimate the fragility of the system and the risk that it could break.

The implications for investors? For one thing, it would be a mistake to think that any trade deal – if one is reached – between the US and China will end tensions between the two countries and resolve the Chinese challenge. Signs of Chinese ambition are everywhere: from their heavy state subsidies for industries of the future, such as robotics and artificial intelligence, to the hundreds of billions of dollars Beijing is spending on its Belt and Road global-trade initiative to the conflicting signals they’ve been sending out about their currency. These issues are actually more complex than tariffs or trade balances; it’s hard to imagine their resolution without a significant impact on global growth and financial-asset prices.

But we should also bear in mind that China’s geopolitical rise isn’t yet carved in stone: Thirty years ago, when I was studying the Japanese language in college, we all thought that Japan was going to take over the world, only to see its economy stagnate and the sun set (at least for the time being) on the Land of the Rising Sun. Similarly, China isn’t without its problems: The country’s economic growth has fallen from 10% annually to 6% over the past decade; leverage has soared inside its economy; the legacy of decades of a one-child policy has created demographic challenges; and the souring of trade (and political) relations with the US may impair the ability of Chinese manufacturers to sell to the vast American consumer market.

As for the US, our economy continues to expand. But, along with most other developed nations, we’re seeing our share of global output declining, as China and, more recently India, go on the ascent. By the way, for all of the publicity that Russia and its cyber mischief-making garner, its economy is tiny – smaller than that of the state of Texas. Has anyone purchased a product made in Russia? Even my house vodka, Tito’s, is produced in Texas.

As a thought experiment, I decided to compare a pie chart of global market capitalization today with one from 1900. Over this 120-year period, the US market cap zoomed from 15% of the world’s to more than 50% (Source: Credit Suisse; MSCI; Gerstein Fisher Research), even though our economy accounts for less than a quarter of global output. Much of the growth in the US market cap came at the expense of the UK, Germany, and France, each of whose shares fell by more than 75% (Source: Gerstein Fisher Research). Clearly, the US has had a very good run. Here’s one dramatic example: If you had invested $25,000 in Coca-Cola stock in 1919, when the beverage maker went public, your holding would today be worth $2.9 billion.

Is American industry heading out to pasture? Hardly. But will China replace us? (Its share of global market cap is certainly on the rise.) As a second part of my thought experiment, I imagined what the world might look like 100 years from now. Just as my grandparents dreamed of a future which became my reality today, now I dream of a future for my kids and eventually my grandchildren 100 years from today.

Diversifying Risk over the Next CenturyOf course, we can’t predict with any accuracy what the world GDP pie chart will show a hundred years from now, but we do have some clues. Economic growth is partially related to population (specifically labor-force) growth and gains in worker productivity. Since population and economic growth are generally correlated, we know that more-populous nations have a high probability of taking their place among the largest economies over time. (See https://pudding.cool/2018/10/city_3d/ for the distribution of the global population.)

A Letter from Gregg Fisher, CFA: Spring 2019 7

In the US, productivity gains have slipped over the past 20 years (for more on this, see a recap of an event we sponsored with productivity guru Robert Gordon and political scientist David Moss https://gersteinfisher.com/wp-content/uploads/2017/05/GF_RealTalks2017_Recap.pdf). Annual growth in the labor force has also shrunk over the past decade, to 0.5%. Unfortunately, an enlightened immigration policy, which could mitigate some of this nation’s demographic challenges, seems out of the grasp of our politicians in Washington. I am eternally grateful that my grandparents boarded boats from Europe in the early 20th century and, like so many young immigrants to America, quickly adjusted to their new circumstances and made the most of opportunities.

Just as we can’t predict which economies will predominate over the next century, we don’t know which investment markets will perform best. Not to beat up on Japan, but the Nikkei Index peaked at 39,000 in December 1989; since then, on a total-return basis, not counting currency effects, investors would have lost about 20% of their money (Source: Gerstein Fisher Research; Bloomberg).

So in the absence of anything like perfect information about which markets will shine and which will flounder – including China’s – what would we advise investors to do going forward, whether for the next hundred years or the next five? Namely, holding a global basket of stocks and countries to diversify risk. Even in gloomy 2018, the global dispersion of returns was quite high. For example, while the S&P 500 lost 4%, other developed-country returns ranged from -22% in Belgium to 0% in New Zealand. (Israel, the worst performer in 2017, was the third-best in 2018; that’s how fast things can change.) The range of returns in the emerging markets was much wider still, from -41% in Turkey to +27% in Qatar – can anyone name a stock in Qatar? (Source: Gerstein Fisher Research; Bloomberg). Some investors have developed an allergy to the foreign markets because collectively they have trailed the US during the past decade: From January 2010 through April 2019, the cumulative return for the S&P 500 was 221%, compared to just 58% for the MSCI ACWI [All Country World Index] ex USA Index (or 13% vs. 5% annualized, respectively).

But there is little information in this recent pattern (except perhaps that high current valuations in US markets would imply lower expected returns). Many investors have forgotten that in the difficult prior decade, from January 2000 through December 2009, foreign markets held the upper hand, returning a cumulative 36% vs. negative 9% for the S&P 500 (or, stated another way, $1 grew to $1.36 in overseas stocks while shrinking to $0.91 in US holdings). Also, keep in mind that many of the emerging-market economies are becoming wealthier as a result of population increases and GDP growth – even as populations are aging and growth is slowing in many developed countries, including the US, most of Europe, and Japan. In the long run, it’s highly likely that investors will be rewarded for holding a globally diversified portfolio, which reminds me of a comment made by Berkshire Hathaway Vice Chairman Charlie Munger at the company’s annual shareholder meeting in early May, which I attended. When Munger, who is 95, was asked whether the investment world has changed, he replied that he’s unsure – but that buying and holding a diversified portfolio seems to have withstood the test of time.

Building Sound PortfoliosFortunately, to achieve a good investment outcome, we don’t need to predict the future (which, incidentally, would require not only forecasting future events more accurately than other market participants but also predicting how the other participants will react to the forecasted events). But we do always need to keep risk management in mind. That’s especially important now, with the current perception of market risk low and stock prices high (despite the financial and geopolitical uncertainties that I outlined above). In environments like today’s, investors forget about the gigantic bear markets (such as the 50% market declines in 1973 to 1974, 2000 to 2002, and 2007 to 2009) that destroy capital and ravage many a portfolio. And those crises are unpredictable; the only thing we can say with certainty is that investors should be prepared to be surprised by the markets. In some of those surprises, the Q4 2018 market swoon will look like a mere fire drill.

A Letter from Gregg Fisher, CFA: Spring 2019 8

Does the recent modest inversion of the interest-rate yield curve or, for that matter, any other “signal” portend recession? We don’t know. But we do build some “insurance” into our portfolios in the form of assets with low or negative correlations to equities, such as high-quality government bonds and “alternative” investments like gold – and we avoid leverage. Within equities, we hold both growth and value, and we look for elements of both characteristics in securities. As Berkshire Chairman Warren Buffett has said, value and growth are “joined at the hip”: A good growth company can be a poor investment if you overpay for the stock, and good value opportunities can sometimes be found in traditional “growth” sectors like technology.

What about start-up “platform companies” like Uber? If their characteristics look good, we’ll certainly consider them. But overall, we’re cautious: These are typically young businesses for which investors are willing to pay premium prices for growing sales even as they overlook losses. Uber, for example, lost $3 billion in 2018 and $9 billion over the past three years. The company was valued at $80 billion at its IPO – but lost nearly 9% on its first trading day.

In my view, building a portfolio that will work well over the long term (while avoiding the big risks) involves an unwavering commitment to fact- and research-based decision-making. When I visit colleges that my son Josh is interested in attending, I discuss research with university professors, some of whom serve as our Academic Partners; I listen to them carefully. I have also been learning a great deal from my “Q Factor” podcast interviews with experts from various fields on how data is changing our lives. Much of this learning is directly applicable to our portfolios – for instance, BlackRock’s Andrew Ang on factor research and investing (https://gersteinfisher.com/podcasts/the-great-factor-summit/), Jesse Redniss from Warner on the data revolution in the entertainment industry (https://gersteinfisher.com/podcasts/jesse-redniss-big-media-meets-big-data/), and Robert Merton on replacing income and funding secure retirements (see link earlier in this letter).

Conclusion: About Your Trust and ConfidenceSome investors expect their managers to beat the market all the time. Other investors are willing to stand apart from the crowd in the short run if it serves their paramount goal of building long-term wealth. Long-term investing has an element of delayed gratification (I’m reminded of the famous Stanford marshmallow test, in which researchers studied delayed gratification in children): Sometimes you have to be willing to forgo some upside in order to minimize the downside. But since awful market events don’t happen frequently, you can’t let fear of a potential storm disrupt your strategy. I have spent a considerable amount of time trying to understand how investors act during good and bad times, so that we can be a better fit for our clients all the time. To me, that means better understanding what causes markets to move.

Meanwhile, of course, the markets will continue to rise and fall. And I will seek to earn attractive returns over time and to avoid losing the capital that our investors have entrusted to me as their portfolio manager. For me, the most important thing in the investment business is maintaining the trust and confidence of our clients and friends. I don’t take that trust for granted; I know I must continuously re-earn it.

Thank you for seeking me out as a steward of your hard-earned capital.

Sincerely,

Gregg Fisher, CFA Founder, Portfolio Manager & Head of Research

212-968-0707 | info@GersteinFisher.com | www.GersteinFisher.com

SPRING 2019

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