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The Long-Term Investor: November 2023

Election 2024, A Moody Market, and a Company Spotlight.


 

A Year From Now: Election Fears Spook Stock Market


Ah yes, everyone's favorite topic, politics, or more specifically, the upcoming Presidential Election in just over a year. I, for one, am already sick and tired of the political advertisements, even though they are far from even entering into full swing. So why am I bringing up a dreaded topic, and why am I bringing it up just over a year before the actual event takes place? By discussing this topic now, I hope to help prepare you for the year ahead (and beyond) by sharing some history of the stock market so that you can be informed ahead of time instead of letting divisive politics and emotions potentially lead you off track from financial success.


As Warren Buffett said: "Following Ben’s (Graham) teachings, Charlie (Munger) and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price."


Or, to put it another way, in the short term, the Market is based on human emotions; in the long term, however, it is based on the fundamental success of the companies that make up the Market. More on this later, but for now, let's focus on why you should not let the 2024 election cycle impact your long-term investment outlook.


Keeping with our Presidential theme, President Harry Truman reminds us that “There is nothing new in the world except the history you do not know.” This brings me to the fact that in the last 24 Presidential election years dating back to 1928, the average S&P 500 return was 7.46%, with the median return being an even greater 10.66%. These numbers align with long-term historical averages for all market years. But what if the candidate you vote for doesn't win the election?

The reality is that whether the Democratic or Republican candidate wins the election a year from now, it shouldn't impact how you view long-term investing, as over the last 90 years, we've had a nearly even split between the parties, and the performance has been almost identical. However, it seems that almost every election cycle, we get headlines of the Market falling on "Election Fears" or something of the like - even though we know there will be an election every four years, and politics isn't exactly an area of sunshine and rainbows.


For example, a September 2020 headline from The New York Times reads: "As the Election Looms, Investors See Uncertainty. They Don’t Like It." Ah, yes, uncertainty as if anything in our world is ever truly certain. If you let that uncertainty get to you, you would have missed a 26% gain in the S&P 500 just over the three years since that article was published.


Or if we look at a Bloomberg article from November 1, 2016, with the headline "U.S. Stocks Fall to July Low as Election Anxiety Rises Amid Fed." I could easily see an identical headline being published next November, as there is sure to be "election anxiety" and concerns about what the Fed will do next. However, if you let your emotions, in this case, anxiousness, take control of your investment policy, you would have missed a 100% gain in the S&P 500 over the previous eight years. Bringing up these headlines is not to scare you but to prepare you, as we will likely see similar ones in the coming year.


Going back to Warren Buffett, who has said that successful investing requires two critical questions:

  1. What is important?

  2. What is knowable?

In this case, we have the answer to these questions. What is knowable? We know that there will be a Presidential election in just over a year, and there are likely going to be headlines that indicate people are experiencing fear or anxiety because of this and the unknown outcomes. What is important? Regardless of the election's outcome, great companies will continue to navigate the political and economic climate as history indicates they have always done. Now that you know the Market's history during the Presidential election years, do not make the mistake of letting your emotions influence your long-term investment strategy. The election makes for great headlines, but history shows us it's not a great time to make changes to your investments.


 

A Moody Market

The Market has gone up, down, and effectively nowhere since May 2021

Over the past 30 months, the S&P 500 is roughly flat from a close of 4,232 on May 7, 2021, to 4,237 at the close today, November 1, 2023. Although for nearly three years we have gone nowhere, we have spent time both above and below the ~4,200 level, reaching an all-time closing high of 4,796 on January 3, 2022, as well as a bear market low of 3,577 on October 12, 2022. It's safe to say that over the past year and a half, the market has been moody and can't seem to make its mind up as to which direction it wants to go.


It can be frustrating to watch your portfolio move up and down over a span this long only to end up right where it started; however, this is where it helps to zoom out and see that this "consolidation," as we call it in the finance world, is healthy for markets in the long term. When markets move sideways over a longer timeframe, many people decide they've had enough of all the swings up and down. They're going to do something else - this shortsightedness creates opportunities for the true long-term investor, which is what Mr. Buffett said in the previous quote about the market being a voting machine in the short run and a weighing machine in the long run. Focusing on the price movements of stocks on a day-to-day, week-to-week, or even year-to-year is only an unnecessary distraction for most people. Thirty months may seem like a long time, but when discussing long-term investing, I am speaking of a time horizon of at least five years, preferably a minimum of 10 years or more. We don't have to look back very far to find a similar time in the market where we effectively went sideways for nearly the same amount of time, from August 2014 to June 2016, when the market acted similarly around the 2,000 level.


Mid 2021 - Present


Mid-2014



Again, this is a time when this market chop could be frustrating. However, we can see that the S&P 500 has more than doubled since this time despite some recent market weakness. We can see that selling in June of 2016 would have been a mistake:


June 2016 Circled

Investing in great companies, especially when the market is moving sideways, is a great wealth-building opportunity.


 

Company Spotlight: UnitedHealth Group (UNH)

Speaking of great companies, UnitedHealth is one of my favorites. UnitedHealth Group was founded in 1977, went public in 1984, and is currently the largest health insurance company in the United States.


UnitedHealth operates in 2 main business segments: Optum, an information and technology-enabled health services business serving the broad healthcare marketplace, and UnitedHealthcare, its health insurance business.


Operating a business in which your product/service is legally mandated is usually a pretty good business to operate, and UnitedHealth does it as successfully as anybody. Since 2014, in the United States, it has been required to have qualifying health insurance or pay a tax penalty. This type of business is highly consistent, has very high barriers to entry, and sells something everyone needs.



As we can see, UNH has been about as steady as any company can be when it comes to growing revenues and operating income, and the stock price has followed suit. On this 20-year chart, shares traded at $20.64 in October 2003; today, shares trade well over $500 for a jaw-dropping 2,400%+ return for patient investors, crushing the 488% return from the S&P 500.

*Prices are adjusted for stock splits.


UnitedHealth Group (UNH) Historical Returns (as of 11/1/2023):


  • 1-Year: -1%

  • 5-Year: 119%

  • 10-Year: 802%

  • 20-Year: 2,499%

 

Unlock Your Financial Potential with Eighth Wonder Investments


Thank you for joining us in this edition of "The Long-Term Investor." As you can see, there are a lot of distractions in the financial news media, as well as in the way the market can behave at times.


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As a reader of "The Long-Term Investor," you already appreciate the value of in-depth, actionable financial insights. Now, take the next step in your financial journey by consulting with professionals who can transform those insights into a tailored plan just for you.

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See you in the next edition of "The Long-Term Investor"!



Disclaimer: All information provided in this newsletter, including references to past performance of investment strategies, market segments, or individual securities, is purely for informational purposes and should not be construed as investment advice, nor does it constitute an offer or solicitation of an offer to buy or sell any securities or adopt any investment strategy. It is important to note that past performance does not indicate future results. Investments can go up and down in value, and you could lose money or not gain as much as expected. Every investment has its own set of risks which could adversely affect results. Before making any financial decisions or investments, readers should consult with a qualified financial advisor to assess the appropriateness based on individual objectives, financial situation, or needs.




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