Client Letter

October 2018

On August 22nd of this year we marked the longest bull market in United States history – 3,453 days (since March 9, 2009). Historically, a stock market correction occurs about every 3.5 years. Clearly, we are overdue. While a correction is overdue, and predictable in general, the exact timing and extent of a correction is anything but predictable. Warren Buffett, the famed Omaha investor and long-time Chairman/CEO of Berkshire Hathaway, often pokes fun at so-called “market timers” – paraphrasing him, “I have met a lot of rich people in my life, and I have met a lot of market timers, but, interestingly, I have never met a rich market timer – they don’t exist.” Fellow billionaire investor, George Soros, bet that the “” market would collapse and he was correct. Unfortunately, he made this bet in 1999 but the collapse did not come until 2000. It cost Mr. Soros a billion dollars for being off on his prediction by just one year.

Let’s take a closer look at predictions and their follies. Most investors have noticed that the S&P 500 (U.S. large companies), and especially the growth style of same, has done well during the latest bull market. So why not simply put all of your money (or most of it) into this particular asset class? Well, when exactly should an investor do this? At the beginning when no one knows for sure how the future will look for this asset class (a bet in the dark) or, instead, after the asset class has performed well relative to other asset classes (a bet to buy high and hope that it goes even higher)? The former is a pure bet on the markets and the latter, well, economists have a name for such folly, they call it “the Greater Fool Theory of Investing.” Restated, I intend to buy high and hope that I can later unload it at a higher price on an even greater fool than myself. Taking bets by timing markets does not work – neither in theory nor, especially, in practice.

While it is true that the S&P 500 has performed well during this latest bull market (almost 10 years), an investor should look to the preceding 10 years to see how this asset class fared. So, if an investor held just the S&P 500 from January 1, 1999 to December 31, 2008, the full ten years immediately preceding the current bull market, such investor would have lost 20% of their net investable assets. It is often called “the Lost Decade,” and for good reason. The investor turned every dollar they invested into 80 cents. Such an investor would have done better by simply hiding their money under their mattress. Putting all of one’s eggs into one basket is never the right decision. More on good decision making later.

The Lost Decade S&P 500.png

How about “value” versus “growth” investing? For those investors not acquainted with the difference, here is a primer. A value investor seeks to buy companies or asset classes when they are selling at a discount (buy low, sell dear). A growth investor takes the Greater Fool Theory of Investing to a whole new level and seeks only to buy when a stock or an asset class is selling at a premium (buy high, hopefully sell higher). So, one could not only put all of their money into just one asset class but also tilt the asset class to a growth model if they like. That takes a concentrated portfolio and puts it on steroids. At times, such a strategy can be hugely profitable as it is today – but not predictably so - for large cap growth investors. More often than not, however, it is a disaster in the making. We at Siena are value investors for a reason.

In 2013, Dimensional Fund Advisors published a study of value versus growth stocks. Their findings are clear - in each and every asset class studied, value outperformed growth stocks over the long-term. The average annual returns in each asset class and style are as follows:

  • U.S. Large Cap (S&P 500) 1927-2012

    • Value: 11.64%

    • Growth: 9.25%

  • U.S. Small Cap (CRSP) 1927-2012

    • Value: 14.77%

    • Growth: 8.69%

  • Non-US Developed Markets Indices (MSCI) 1975-2012

    • Value: 14.85%

    • Growth: 8.79%

  • Emerging Markets Indices 1989-2012

    • Value: 15.95%

    • Growth: 10.31%

A decision is right or wrong at the time it is made – regardless of the outcome. Had we taken a bet that any one asset class would have performed better than others (a market timing scheme) we should be fired as your advisor – regardless if our bet was profitable or not. That’s not investing, instead, it’s a form of gambling; alas, without all the attendant excitement of travel, meals, and shows. If you are going to gamble then you might as well enjoy yourself. If, instead of gambling with your retirement accounts on one asset class (such as the one that is currently in vogue), you globally invested, how then would you have fared during a comparable 20-year period (using 1997-2017 data to see a full 20 years)? The answer: for every $1 invested in the S&P 500 from January 1, 1997 through December 31, 2017 an investor would have grown their portfolio to $5.35; during that same time period, however, a globally diversified portfolio would have grown from $1 to $7.91. And there is more to the story, as the investor in the globally diversified portfolio not only made a higher return during this long period of time but they also enjoyed a far less volatile portfolio along the way (i.e., no “Lost Decade” for the global investor).

Growth of a $1 1997-2017.png

There is a science to investing, and that science is not about putting all of your money into one slice of the pie (after all, Siena provides you with a pie chart in your quarterly reports for a reason – diversification matters). The science of investing is about careful research and study to construct an efficient portfolio based upon inverse correlations (the balance of one asset class going down when others historically do well), coupled with patience and calm - both in good times (avoiding greed) and bad (avoiding fear). Our responsibility as advisors is to create such a portfolio and, through an Investment Policy Statement, continually monitor and periodically rebalance the portfolio within the portfolio’s parameters to keep the investor within a certain risk and expected return profile that the investor chose (with our guidance) as most appropriate for them. Such a portfolio was chosen for both good times and bad. It is the responsibility of the investor, though, to remain patient and keep calm, avoiding the all too common follies of greed and fear.

So, we clearly see that successful investing is about creating a globally diversified portfolio specific to an investor’s unique risk and expected return needs. Successful investing also requires that the investor accept the inevitable down-markets which occur about 25% of the time (about every 3.5 years) in order to capture the upside potential of up-markets which occur about 75% of the time, all the while, avoiding the temptation of greed and the panic of fear.

After a nearly 10-year bull market, we are currently facing a potential correction for a multitude of reasons: increasing interest rates, trade disputes with China, a near secular economic decline in much of Europe, as well as South and Central America, the mid-term elections in the United States, etc. None of these issues is permanent, though they are extant and can have both short and long-term effects.

Recalling your financial goals, keeping in mind your investment time horizon, and approaching investing as a science will ensure a worry-free retirement. Additionally, and to your great benefit, you are an institutional (wholesale not retail pricing) investor with Siena Investments, who serves you as a commission-free, fiduciary with advisors possessing substantial education, training, and experience. We encourage you to read more about our thoughts on the current markets, as well as more specific aspects of investing, tax optimization, retirement planning, estate planning, etc. at our website at

Thank you,

Steve Hicks

Courtney Miller