Chairman's Message: Perspective is Everything

Perspective is Everything

We are in challenging times. A massive trade war with far-reaching consequences, threats of annexation of independent countries, pardons for convicted rioters and criminals, retribution politics, round-ups and deportations, massive changes to health and social policies, and technology leaders and companies in unprecedented positions of global power. The world seems to have come off its moorings, alliances and allegiances are shifting, and the future seems very uncertain. But this is not the first time, and it won’t be the last.

I recently came across two books I had read years ago -- Team of Rivals (Abraham Lincoln) by Doris Kearns Goodwin, and The Next Hundred Years (geopolitics) by George Friedman.

Both remind me of the importance of perspective -- not coincidentally, the name of this publication. It is always difficult to see the whole “forest” when you are in the middle of it, surrounded by “trees”. Yet, perspective is what all investors and wealthy families need -- a sense of what is important over the long term and not just what we see in the newspaper headlines today.

In the Lincoln book, I was struck by how significant and intractable the key issues were in that era (slavery, states rights, the Whig Party) and how hard it would have been to imagine that the US would find a way to thrive over the long run despite these issues.

George Friedman puts an even finer point on it, from a global geopolitical perspective.

Imagine yourself, he says, in the summer of 1900 with Europe thriving through interdependent investments and trade, enjoying unprecedented peace and prosperity, not to mention completely dominating the Eastern hemisphere. In fact, war was thought by many to be virtually impossible. The future seemed fixed: a peaceful prosperous Europe would rule the world.

Then imagine yourself, just 20 years later, in the summer of 1920, in the aftermath of a horrific European war resulting in millions of casualties and ending in the destruction of the German, Ottoman and Russian empires. Who knew then what the future would hold? But one thing seemed certain: the peace treaty that had been imposed on Germany guaranteed that it would not soon re-emerge.

Once more, imagine yourself in the summer of 1940. Germany had not only re-emerged but had conquered France and looked set to dominate all of Europe. Russia had also re-emerged as the Soviet Union and was allied with Nazi Germany. Britain stood alone against its enemies and the outcome of the war appeared hopeless. It seemed that Europe’s fate had been decided for the next century. Germany would dominate Europe and inherit its empire.

Now imagine the summer of 1960. Germany had been defeated, European empires were collapsing, and the US and USSR were competing over who would be the heir. The US had emerged as the world’s global superpower, seemingly able to dictate terms to anyone in the world. But the USSR was also flexing its international muscle. And in the back of everyone’s mind, the Maoist Chinese, seen as fanatical, were a growing global power.

Fast forward to the summer of 1980. The US had been defeated in a seven-year war -- not by the Soviet Union, but by communist North Vietnam. America was seen, and saw itself, as in retreat. It was also expelled from Iran with the risk of oil fields falling into the hands of the Soviets. The US formed an alliance with Maoist China, to try to contain the surging USSR.  

Finally, imagine it is the summer of 2000. The Soviet Union had collapsed, the Chinese economy had essentially become capitalist, and NATO had advanced deep into eastern Europe. The world was prosperous and peaceful. Everyone knew that geopolitical considerations had become secondary to economic ones and things seemed destined to continue down this path.

Friedman’s book was written in 2009, long before the next 20-year check-in -- the summer of 2020. But the 2000-2020 period also contained much that was unexpected, including 9/11, the Iraq War, the Global Financial Crisis, the rise of Trump’s MAGA movement, COVID-19, and a rise in global geopolitical tensions.

For some, this next phase inspires fear and hopelessness, and for others it may feel like a breath of fresh air and a world of possibilities. What we do know is that in geopolitics, financial markets, and even in family affairs, the way the world looks right now is rarely how it will look in 20 years. We tend to think that whatever we are seeing today is so permanent and dominant that it will always be the case. But things change. We need to retain perspective and be open to the long-term shifts taking place in the world.

This perspective helps bring some balance, rationality, and emotional maturity to the management of private wealth, which can help avoid some of the errors caused by kneejerk reactions to day-to-day worries. It is particularly helpful when the focus is firmly grounded in the needs and goals of the family vs. the 'noise' of current events.

There are many things to think about in times like this. One question we are often asked about is how people should think about their investments, and in particular, equity markets. There certainly is no shortage of ‘noise’ when it comes to the equity markets right now. Markets continue to reach new all-time highs, but a very small subset of companies (i.e. the Magnificent Seven) has driven most of the market’s return in the last two years. At the same time, the global economy is facing heightened risks from the highly unorthodox economic policies being introduced by the new US administration.

The result is that many investors may feel like they should be doing something, even if they aren’t sure what that ‘something’ is. Some individuals may be experiencing FOMO and be tempted to chase the returns of the market, or conversely, they may fear the unknown impacts of changing economic policies and be tempted to move to the safety of cash. Neither of these portfolio actions usually works out to the benefit of the individual or their family. Again, keeping perspective and seeing the forest (your long-term goals) for the trees (market ‘noise’) is usually the soundest course of action for long term success.

When thinking about families and their financial wealth, three thoughts come to mind.

One, every family’s needs are different, and their portfolios should reflect those differences. If you have relatively high spending priorities over the near term (5-10 years) such as education, homes, charitable, lifestyle funding etc., you should keep some or much of that money in liquid and conservative investments.

If you have significant multigenerational wealth goals and you have excess capital above your lifetime funding needs, you probably want to have a larger allocation to growth assets and you can likely withstand more volatility and illiquidity than others could. In simple terms, your assets (investment mix) should match up with your liabilities (spending goals).

Two, it’s always proven valuable to be an owner vs. a lender over the very long term. Throughout history, building wealth (and protecting it from inflation) has been accomplished, for the most part, by owning businesses, either directly or through investing in the shares of publicly traded companies. And trying to figure out when to get out, and conversely when to get back in, has been an unproductive strategy for almost everybody.

And three, what you pay for those businesses is important – particularly if your investing horizon is 10 years or less. If you overpay, it may take you quite a while to get back to earning a reasonable return on your capital. (Current market valuations by most measures are at the high end of historical ranges.) On the other hand, if you underpay, it provides you with a margin of safety that allows you to wait out the inevitable downcycles in markets and benefit from the ultimate long-term growth.

History reminds us that uncertainty is the norm, not the exception—what feels inevitable today will seem improbable tomorrow. The key to navigating change, whether in markets, geopolitics, or family wealth, is not reaction but perspective.