Over the past ten years (through 9/30/10), the S&P 500 has traded (very roughly) between 1600 and 800. It currently stands just under 1200 and, adjusted for dividends, has produced an annualized negative total return of -0.4% for the ten-year period. (Our stock funds’ returns ranged from +1.8% to +8.0% per year during that decade.)
The 2000 peak of the “tech bubble” and the 2007 peak of the “housing bubble” were followed by bear markets that cut the S&P 500 (roughly) in half. The rebound that began in March of 2009 recovered about half of the lost ground by April of 2010 and the market has been bouncing sideways ever since.
The causes and dimensions of the latest boom and bust have been well-chronicled. What is not clear is how long the repair work will take in the U.S. and how global economic crosscurrents of emerging nation growth and Euro-zone financial crisis will play out. There are a number of factors contributing to the slow and uneven pace of the current recovery.
Yet, at the same time, individual businesses are finding ways to cope. Corporate profits are rising and many of the individual companies we talk to and read about are doing quite well. This paradox is causing investors fits and the “up one month, down the next” market behavior is the result.
We are not inclined to take extreme positions—either positive or negative. Rather, we are trying to take advantage of the opportunities that the market offers. Generally, we are finding the best “bargains” in large, high quality companies. We wrote about nine of them in our last quarterly letter, but there are many others suffering from similar disregard.
The volatility of the market has also presented many trading opportunities as several of our favorite, very stable companies have seen their stock prices move up and down through 25-50% ranges. We are not “traders” by nature, but we are willing to accept those “gifts” (especially when we have realized losses available to offset taxable gains). Taking advantage of this volatility has increased our portfolio turnover somewhat in recent quarters, but it is still low by mutual fund standards and we would expect the change to be temporary.
Read the complete shareholder letter