October 28, 2022
Article By Thomas Twombly, President
Artwork by Daisy Lopez, Staff Accountant

I believe that truly investing in anything for the long term, just like the decision to become a parent and raise a family, or to build and manage a business through many decades of uncertainty and challenge, or to stalwartly own a portfolio comprised of the great companies of the US and the world, is an open-ended act of faith.

It’s a mission for grim optimists. It favors people who are determined to remain disciplined, patient and convinced they can and will adapt, overcome, and succeed in the long run, in spite of guaranteed, sometimes fearsome, setbacks. It demands that one always look to the future – not just the near-term future, but the far horizon – knowing full well that that hazy horizon will forever recede in front of us.

As with parenting, one can never fully predict what the outcomes will be. One can never know what specific events will occur, in what order, and how they will ultimately impact each other. And the results, both negative and positive, will often come as a complete surprise. Success in the long run demands that we just keep doing the right things, while embracing ambiguity and acknowledging the impossibility of knowing anything for sure. That challenge is never easy.

Bear markets happen, and they are miserable. They worry you. They beat you down. They wear you out. They chip away relentlessly at your conviction. They do everything possible to undermine your discipline, and to sabotage your determination to remain patient and focused on the far horizon.

Every single one feels “different this time” because they are different, and because they never happen in a vacuum. Every bear market is accompanied by some new and much broader “crisis” that threatens your sense of stability and security in ways you have never experienced before.

The media (and most politicians) can’t help but reinforce the pessimistic narrative that takes root so easily in anyone experiencing this sense of fatigue. The immutable truth is that negativity sells. Existential doom and gloom garner way many more clicks than nuanced long-range perspectives.

The vast majority of people can’t help but be affected by this fearful narrative. Our tendency to follow the herd and to be moved to action by powerful emotional stories is deeply rooted in human nature. This is one of the main reasons why human nature, left to its own devices, is a failed investor. To succeed in the long run, you continuously have to overcome your basest instincts.

My first bear market experience was in 1987, three years into my career. I had recently turned 26 and hardly had any meaningful investments myself. But my parents, who had waited deliberately for that entire period to make sure I was going to make it in this profession before becoming my clients, had just transferred all their retirement accounts over to my firm and invested a substantial portion in a blue-chip stock portfolio – just three weeks prior to the October 19, 1987, crash.

What a trial that was. In a dramatic culmination to a 3-month, 34% decline in US equity markets, the Dow Jones Industrial Average famously dropped -508 points that Monday, on unprecedented volume of over 600 million shares. That single-day drop of -22.6% stands to this day as the largest one-day percentage decline in history.

The headlines across the country the following morning screamed “Panic!” and “Bedlam on Wall St.” and they rejuvenated the foreboding label of “Black Monday”, conjuring up terrifying memories and comparisons to the 1929 crash that set off the Great Depression. But we soldiered on.

Prior to the one we’re in the midst of now, my last bear market experience was the 33-day -34% plunge we all endured in early 2020. Global contagion, morgue trucks in Manhattan, entire economies shut down. You know the story. It happened a remarkably short time ago. And we soldiered on.

And in between those experiences, I steered myself, this business, a whole lot of clients, and a great many friends through two massive bear market declines of -49% that played out over 30 months starting in March of 2000, and -57% that occurred over 17 months beginning in October of 2007. Together, those bears took place within a single ten-year period that resulted in the worst such period in US history – the so-called “lost decade.” And then, too, we soldiered on.

In retrospect, every single one of those experiences presented investors with compelling opportunities to invest in the great businesses of the world at substantial discounts – or at least to hold on to their existing investments. There are very few who didn’t wish later that they had acted with greater faith and courage that all would eventually be well. But hindsight is always 20/20.

The future we invest in and for is unknown, and unknowable. It always will be. Yet the desire for certainty is so intensely attractive that we feel lost without it. It’s a fascinating paradox, because this yearning becomes particularly intense at major inflection points, like now, when all our previous assumptions of stability and predictability have suddenly been turned on their ear and we’ve been forced to recognize (again) that very little in our existence is immutable.

But there are a few things that are immutable about human beings as a whole that keep me looking towards the far horizon. They are qualities that have endured throughout all the past tumult, and I have confidence that they’ll endure throughout the current environment and then well beyond. One is our capacity for adaptation, which is unmatched by any species on the planet. Another is our capacity for relentless innovation. We possess, deep in our very nature, an intense drive to be better, to do more, and to create new and unique solutions to challenges and opportunities that confront us.

It’s important to keep in mind that those immutable traits are a fundamental component of what we’re investing in when we own the great businesses of the US and the world: dynamic, adaptable, and driven teams of human beings, who are responding in real time to all of the challenges they face and constantly creating new opportunities and new possibilities. Because they too believe wholeheartedly that if history is any guide, this too shall pass.

Thank you again for your confidence and trust. And keep the faith.

Thomas G. Twombly