The ending of one year and the beginning of another can prompt introspection and the search for perspective. Considering this, and acknowledging that we are investing in an economic and market environment of historical significance, one in which many investment norms seem to be changing, I have chosen for inspiration the words of the great Bard, William Shakespeare, from perhaps his most famous play, Hamlet.
“This above all: to thine own self be true,
And it must follow, as the night the day,
Thou cannot then be false to any man.”
In this letter I wish to review two of the foundational beliefs that have been so important to our firm and the way we invest. These beliefs, because we have followed them consistently over the 45 years of our existence, comply with Shakespeare’s dictum, “to thine own self be true.” These beliefs are who we are. I believe that our loyalty to them has been an essential ingredient in our ability to produce what we believe are satisfying results for our clients. I will also provide context on why these principles apply within today’s economic and market environment.
DIVIDENDS AND QUALITY. Hardly anyone will be surprised that I would start with these two items that are so tightly integrated, and that have been so basic to our investment approach. Our discussion of these is made against the overarching backdrop of our belief that common stocks are the asset of preference over the longer term, simply because they have the potential to grow. We also have full appreciation for the merits of bonds and how valuable a combination of stocks and bonds can be in terms of diversification and preservation of capital.
The importance of dividends and quality goes back to the beginning of our firm. It was my desire to start an “investment firm.” The meaning of the term “investment” is important, for it implies an attitude of seriousness about the task of committing funds on behalf of clients. We have never been a firm that chases returns, never taken speculative approaches, but instead, we have always assumed a fiduciary approach to investing in the highest quality stocks and bonds that we can find. In our view, the term “investment” also must hold within it an element of preservation. This becomes a meaningful benefit when markets turn sour, as they inevitably do.
Our philosophy assumes that the future is unknown and, therefore, offers a wide range of potential investment outcomes. For us, to “invest” is to commit to companies that have the capability of narrowing the range of outcomes thus enhancing our chances of a favorable investment result. We noticed early on that companies that consistently pay and raise their dividends have attractive characteristics. They have strong balance sheets that provide stability and flexibility. Their businesses are often driven by steady demand, regardless of cyclical influences. They are well-managed and shareholder-friendly. Companies with these characteristics usually produce a very consistent pattern of earnings and dividend increases. In short, they are high-quality companies, and the consistency of the dividend leads us to them.
There are many attractive features of dividends. They provide a predictable source of income. They enhance total investment returns by being a positive contributor to returns in both up and down markets. And, as noted, they provide a window into the essential elements of quality. As such, dividends and quality are interrelated and form a sound basis for true investment. Our loyalty to dividends and quality will remain.
INVEST FOR THE LONG TERM AND STAY INVESTED. This would appear to be obvious. However, it is not adopted as widely as it should be, and many investors wind up wasting the most precious thing they have, which is time. It all comes down to the power of compound interest and the ability to build wealth over the long term. Not everyone understands the power of compounding, but once experienced and appreciated, it becomes a magnificent ally for the investor. The first step in compounding is to get invested. The second is to stay there, for the magnifying effect of compounding can only occur over the long term. Thus, our investment approach embraces dividend-paying, high-quality securities, and then commits to the longer term so the power of compounding can take over.
Staying invested over the long term means enjoying the benefits of rising markets but also tolerating the unpleasantness of declining markets. And the best way to tolerate the down periods is to remain invested within the confines of an investment program that is built to protect on the downside. Quality helps us here, as does the positive contribution of dividends. When trouble begins to brew in the markets, it is always a temptation to sell with the idea of returning when things look better. It sounds so easy, but it is so difficult. Importantly, attempting to do so is an interruption in the time process of compounding. When not invested the benefits of dividends are eliminated, and the investor is susceptible to the possibility of missing out on what are inevitably the biggest days of upside when the markets turn. It just doesn’t work, so it’s better to stay invested for the long term and enjoy the benefits of compounding. We know it works because we have seen it, and enjoyed it, over the last 45 years.
THE RELEVANCE OF OUR BELIEFS IN THE CURRENT ENVIRONMENT. Currently, we find ourselves in an economic and investment environment that is both interesting and challenging. It is not the best of economies because within it there are contradictory elements that have produced markets that are not as well balanced as one would like. For instance, the U.S. economy currently is growing above trend. Third quarter real Gross Domestic Product (GDP) was recently reported at the surprisingly strong rate of 4.3%, quarter over quarter. And while consumption growth at 3.5% was one of the main drivers, this is puzzling since consumer confidence remains at multi-year lows. It looks like a lopsided economy, powered on the one hand by extreme levels of investment in Artificial Intelligence (AI) and on the other hand by consumption that is supported by consumers at the top end of the income scale. “Affordability” is the popular word that among most levels of income reflects widespread discomfort with the cost of living. Meanwhile, the Federal Reserve (Fed) remains in a cycle of lowering short-term interest rates even though inflation remains significantly above the 2% target. Should the Fed anticipate further easing of monetary policy in the face of 4.3% economic growth? Finally, the stock market is totally consumed by the AI phenomenon, leading to intense stock market concentration in the major AI players and extreme valuation levels for various sectors of the market.
When the majority of economic and market factors are not moving in concert it can be confusing to investors and lead to uncertainty. It is a picture that typically suggests risk. When things just don’t “feel” quite right, it usually means something, and caution should be considered. Thinking back over the last 45 years, there have been periods when some of the above issues were present, but not, in our memory, were they all in play at one time. Our advice: make an investment in high-quality, dividend-paying stocks that have demonstrated staying power in the face of economic challenges and that offer the advantage of downside protection, should it be needed. And of course, stay invested. The prospect of compounding demands it. We can point to problems within the U.S. economy, but we can also say with confidence that we believe it will continue to be the best economy for long-term investment because of its deep resources that provide flexibility and competitive advantages compared to other international economies.
The emergence of AI is a perfect example. The U.S. is in a race to achieve and retain its dominance in AI. With this effort comes the potential for disruption as employment opportunities are distorted and some career skills become obsolete. Yet, the challenge of change may be the opportunity for major productivity gains and higher overall growth for the economy. This is not the first time our economy has faced such challenges, and it won’t be the last, but our assumption is that it will adapt and eventually we will find ourselves in a better place.
To conclude, we return to Shakespeare. He sagely points out that if we are true to ourselves, we will also be true to others. There is an element of transparency here. At our firm, we know who we are, and we are loyal to that understanding of ourselves.
Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.
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