by Tom Bradley

When my wife and I are surprised or confused about something, Lori has the habit of saying, "What’s going on?" Rather than wondering or speculating, she gets to the bottom of it.

When it comes to the stock market, a lot of people are asking just that question these days. It’s been on a tear over the last six months, regularly hitting new highs. Not surprisingly, the answer is a combination of things, many of which overlap and fuel each other.

History. First of all, it’s what markets do. A long-term chart of the overall market trends up and to the right, with a steady diet of new highs along the way.

Starting point. I don’t like to assess the sustainability of any trend without first identifying where it started. Often, a large part of a market surge is simply a recovery from an unusually weak period. Indeed, the current run started last fall when investors were worried about inflation, interest rates, and recession.

Fundamentals. Companies are doing well in the absence of a full-on recession. They’re growing sales and reporting solid profits. There are exceptions of course (commercial real estate being the extreme), but our fund managers see a broadening of the market. There’s less dependence on the mega-tech stocks and more recognition of good news in other sectors. Fundamentals matter again (they always do in the long term).

Valuations. Rapidly rising markets are invariably fueled by an increase in valuations. That’s certainly been the case in recent months. The price investors are willing to pay for future profits has increased. It’s not universal but many sectors are now being priced more fairly than a year ago when AI was getting all the attention.

These factors help explain why markets have been doing well but tell us little about where they’re going (we’re a broken record on this, I know). With that in mind, the Steadyhand approach entails sticking to a long-term plan (staying steady!), giving our fund managers the scope and time to do their thing, and avoiding big mistakes at market extremes (i.e., when investors are euphoric or despondent). And when prudent, taking advantage of those extremes.

At present, fundamentals, valuations, and investor sentiment are telling us to not get carried away, but rather keep the Founders Fund’s asset mix close to its long-term target. For clients who know they’ll need money for something in the near term, our advice is to set aside what’s needed in the Savings Fund. For everyone else, keep it simple. Make regular contributions and follow Charlie Munger’s first rule of compounding – never interrupt it unnecessarily.

I’ve just scratched the surface here on our approach and advice. We’ll go further at our Where to From Here? presentations coming up in May, taking place in seven cities across the country. Covid interrupted our annual investment forum for a few years, but I’m looking forward to seeing our clients in person again and hope you can make it!

I encourage you to read the rest of our Q1 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.

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