The stock market was “flat” for the fourth quarter and our stocks gained 2-3%. For the year the market was up approximately 16% and our equity returns were better than 20%; clearly, another good year.
For the last four years we have taken a “glass is half full approach” to equity valuations and market direction. We have spent a great amount of time giving encouragement to our clients to counter the mostly negative and scary macroeconomic and political issues that our country has faced. First we were all focused on the “great recession” and the financial meltdown of 2008-2009, more recently the agony and dysfunctionality of the fiscal cliff negotiations.
Fortunately, a good deal of our research, time and effort, is spent talking with and analyzing businesses. We call this “bottom up” research. From an individual company level we know that balance sheets are pristine, business is good, and most managements have learned to deal with economic and regulatory uncertainty quite successfully. The many disruptions of the past few years have created opportunities.
Bernard Baruch, the greatest investor of his time, was famously quoted as saying, “I buy when there is blood on the streets.” Warren Buffet, the greatest investor of our time has said, “I like to buy when others are frightened and sell when others are over-confident or complacent.” Commentators have called the last four years a “stealth bull market”. No one has been particularly happy or comfortable and therefore we have “climbed a wall of worry.”
We expect continued market gains in 2013. Investors in the aggregate are underweighted in US equities, and overweighted in bonds and cash. We see money coming out of the bond funds and perhaps foreign investing, and being reallocated to domestic stocks. Also, merger and acquisition activity which was dormant in 2012 is starting to pick up in the last several days, as companies have begun to utilize some of the enormous cash on their balance sheets.