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The Main Thing

The main thing is to keep the main thing the main thing.

Stephen Covey

Imagine in January 2020 with the stock market at all-time highs, you had the prescience of knowing the world would be battling a global pandemic for the next two years. Assume you knew that 5.4 million people would die globally out of the 277 million disease cases, with over 800,000 of those deaths in the United States alone. Finally, suppose you had the knowledge that two years later a mutation of that infectious disease would be spreading faster than ever as the world continued to grapple with the COVID monster. At that time, with all this knowledge in hand, if you had predicted the total return for the stock market in the coming two years, imagine how dire your forecast might have been. Surprisingly, during these last two pandemic-laden years, the S&P 500 rose more than 50%. Imagine that!

Why Such a Strong Stock Market?

One explanation for the strong stock market returns during this pandemic era is the massive fiscal and monetary policy response to the pandemic. The resulting tsunami of liquidity has helped lift asset values across the entire investment spectrum. An additional factor, technological innovation, has made the United States the undisputed leader of the digital revolution that is changing many aspects of how we work, communicate, and play. The massive moves to work-from-home and hybridwork environments, as well as an acceleration in the shift to e-commerce, have boosted the growth rate of our domestic technology industry. The U.S. stock market has been the envy of the world in recent years led by the seemingly unstoppable growth of our gigantic technology leaders.

The Unknowable Future

The past two years should serve as an emphatic reminder to all investors that future events and the stock market’s reactions to them are unknowable. At Baird Trust, we think an important ingredient in achieving long-term investment success is to spend our time primarily on things that are knowable rather than unknowable.

Unfortunately, this is the time of year that many investment professionals make their predictions about the new year. It is important to remember, as you are bombarded with one prognostication after another, they are mostly dealing in the realm of the unknowable. As such, aside from some entertainment value, you should not take seriously their predictions about the future.

So Many Distractions!

One of the most difficult challenges for investors is to stay focused and disciplined during turbulent periods with many distractions swirling about. For that reason, the last two tumultuous years have confused many investors. We have experienced economic lockdowns and re-openings, a disturbing number of small business failures, social unrest, political and societal polarization, and a growing distrust of many bedrock institutions of society. This unappealing backdrop combined with some of the strongest stock market returns in years has left many investors befuddled.

This rapidly changing world, combined with high-speed markets, has been difficult for any investor who has attempted to conquer the markets by hastily moving their investments around based on the news of the day. The enormous swings have simply been too volatile for most investors to succeed using a trading strategy. We think there is a better way.

Our Main Thing

Stephen Covey was a noted educator and author whose most popular book was The 7 Habits of Highly Effective People. He is also known for saying “the main thing is to keep the main thing the main thing.” While this maxim can be applied to many aspects of our lives, we think it is fundamentally important in the pursuit of investment success. In this swiftly changing and noisy world, it is all too easy for investors to get distracted from their “main thing.”

Our main thing at Baird Trust is to help you achieve your investment goals while using only high-quality securities to help control for risk. With a largely unknowable future, we attempt to have your portfolios prepared for tough times before they arrive. We do this in stocks by focusing on sturdy, market-leading companies with durable business models and enduring advantages over their competition. We seek strong leadership and healthy corporate cultures, and we invest only at prices that make sense. We take a long-term business owner approach, which allows these successful companies to compound your investment for many years. This approach is simple to understand but difficult to execute well. It requires diligent study, discipline, and highly rational decision-making. We attempt to bring these attributes to the task every day.

We also focus on high-quality securities in fixed income by assembling portfolios of highly rated bonds that will stand the test of time through all kinds of environments. Discipline is especially important in this world of astoundingly low interest rates. The worst time to reach for yield is when it is hardest to f ind. We believe the risks today are simply not worth taking to achieve slightly higher yields.

Avoiding Unproductive Assets

Staying focused on our main thing means we don’t invest in areas that are outside our circle of competence. One such area is the broad category of unproductive assets. We invest solely in productive assets, which we define as securities that generate reliable streams of cash flows for the benefit of their owners. Productive assets provide some downside protection since investors will, under virtually all circumstances, be willing to pay some price for a sturdy, cash-producing asset. On the other hand, unproductive assets produce no cash flows and therefore, don’t have as much downside protection. This doesn’t mean they can’t be successful investments. But it does mean the additional risks an investor takes in unproductive assets are not ones we are willing to take with your money. Risk mitigation is always on our minds when we are investing for you. Unproductive assets in the markets today have attracted a lot of attention and speculation. We include in this group many IPOs, SPACs, meme stocks, money-losing early-stage companies, and cryptocurrencies.

Cryptocurrencies are Risky

Cryptocurrencies have been the focus of much investor attention in recent years and are worthy of further comment. While the underlying blockchain technology that enables them to exist is fascinating and likely to bring about profound changes in the future, we are still very early in understanding what those changes might be. While fortunes have been made by some early investors in cryptocurrencies, any investor who commits capital to that space should understand the elevated risk they are taking. An important element of our investment success over the years has been avoiding speculation in all its forms. Speculation is widespread in cryptocurrencies and other unproductive assets, and we are not tempted in the least bit to participate. Noted investor Andre Kostolany summed it up well when he said, “I can’t tell you how to get rich quickly. I can only tell you how to get poor quickly; by trying to get rich quickly.”

As we begin a new year, we thank you for entrusting your important investment assets to Baird Trust. We are humbled by the confidence you place in us. In this rapidly changing world, we strive to be a helpful source of stability for you. We value the relationships and friendships we have built with you in the past and pledge our best efforts to further strengthen them in the future.