Dear Clients and Friends of Insight,

Welcome to the new year!  Before we review 2021, I have a prediction for 2022 – it will be remembered as the year of moderation.  In contrast, 2020 and 2021 will surely be remembered for their extremes.  I hope I am correct.

The list of last year’s extremes is long but here are a few:  continuing expansionary fiscal and monetary policies, escalating inflation with home and energy prices exploding, frenetic trading in cryptocurrencies and MEME stocks, indiscriminate investments in special purpose acquisition companies (SPACs) and initial public offerings (IPOs), and the shortages of workers and computer chips.  All these extremes, while the S&P 500 Index marched higher to set 70 all-time highs and end the year up over 25%!

A review of our counsel to investors from our 2021 letters is instructive.  

In January we correctly cautioned that “stock selection should be cautious and selective… and that we would focus our efforts on the companies with expectations that seem to us most reasonable and whose results are likely to be achieved or surpassed, while bypassing those companies with the highest expectations and whose results are more likely to disappoint.” 

  • Back then, pandemic winners such as Peloton, Docusign and the SPDR Biotechnology ETF began the year with very rosy expectations, only to see their stock prices crash from peaks earlier in the year resulting in declines of over 75%, 50% and 35%, respectively.  Meanwhile, the shunned Energy Sector advanced a stunning 50%.

In April we shared our concern that “our economy is now extremely strong and gaining momentum… a dangerous situation is brewing… too much money chasing too few goods will lead to rising prices and possibly result in an expectation for a continual rise in future inflation.”

  • Indeed, inflation has soared and the expectation that price increases will persist well into the future is continuing to gain favor.  Many recently negotiated labor contracts now contain automatic cost-of-living adjustments and Social Security checks will be going up for years to come.  For now, though, major bond investors continue to accept negative returns, as the year’s 2% loss in the Barclay’s Aggregate Bond Index shows, even though interest rates have yet to rise much.

In July we reinforced our concern that “inflation is a severe risk”and“we are skeptical that these inflationary conditions will be transitory… and believe investors should be positioning their portfolios in anticipation of a period of extended inflation.”

  • The number and value of initial public offerings broke the record books in 2021.  Most of these companies have limited revenue and lack profits, so it is not surprising that, with the imminent rise in interest rates, they are trading on average 10% below their initial prices.  Robinhood, a most popular one, is down 50% from its debut.  Meanwhile, many S&P 500 companies continued to increase their payouts to shareholders with dividends and share repurchases.  These payouts totaled nearly $1.5 trillion in 2021, and each set records.

In October we warned that “risks have multiplied… though we maintain our positive long-term view of selective stock ownership… don’t fight the Fed has always been good advice for investors… investment capital is abundant and enthusiastically available to invest.”

  • Recently, the Federal Reserve indicated their plan to reduce their level of bond purchases and begin raising interest rates later this year.  This continues their expansionary policy, just with a bit less fuel.  And, cash balances around the world remain at record levels searching for a home.  The backdrop for stocks remains positive, and we believe many stocks are attractive on a number of measures.

As for Insight’s clients, their 2021 portfolio results were superb.  Our discipline of owning well-established and highly profitable businesses that pay their shareholders reasonable and growing dividends was well rewarded.  Our excellent stock performance propelled investment results well above long-term expectations.

As for Insight’s business, we experienced another strong year of growth.  We gained several new clients from referrals and many existing clients added funds to their portfolios.  Clients now trust us to prudently manage $140 million of their wealth.  Thank you for your confidence!

Wishing you a healthy and wonderful new year, and one that is hopefully a moderation from our recent past.