The Magnificent Eleven: A History of Monetary Tightenings since 1965.


















1. September 1965 – November 1966: During this year-long episode, the U.S. faced inflation concerns amid low unemployment and the escalating Vietnam War. The Federal Reserve, led by William McChesney Martin, initiated a tightening period, although debates persist about whether it constitutes a "soft landing." This period involved a "credit crunch" and a "growth recession." Despite some disagreements, it underscores the intricate interplay of fiscal and monetary policies.


2. July 1967 – August 1969: The U.S. witnessed a significant rise in inflation, peaking at around 6 percent, leading to a two-year tightening cycle by the Federal Reserve. A total rate increase of 540 basis points occurred. Interestingly, fiscal policy was also employed, with President Johnson seeking a tax hike in early 1967, although its passage took time. The combined efforts resulted in slowing GDP growth and eventually a recession in 1970. This episode can be seen as a "softish" landing, which reduced core inflation to approximately 4.5 percent by 1971.


3. February 1972 - July 1974: In this episode, the U.S. faced a unique blend of challenges. President Nixon's wage-and-price controls in 1971 led to surging inflation. Additionally, substantial monetary stimulus in anticipation of the 1972 presidential election and supply shocks further complicated matters. The Federal Reserve responded with a massive rate hike, raising rates by roughly 960 basis points. However, stagflation, characterized by both inflation and recession, persisted. The Fed grappled with policy uncertainty and fluctuating interest rates, resulting in a prolonged and severe recession.


4. January 1977 – April 1980: Following a brief respite from inflation, the U.S. experienced rising food and oil prices in 1978 and 1979, partly due to global events like the Iranian Revolution and Iraq's invasion of Iran. Paul Volcker, leading the Federal Reserve, took decisive action by raising the federal funds rate significantly, ultimately increasing it by 1,300 basis points. This period involved two recessions, with the first in 1980, attributed more to President Carter's credit controls than monetary policy. While the landing was painful, it contributed to lower inflation rates in subsequent years.


5. July 1980–January 1981: Paul Volcker's Fed aggressively raised rates to combat inflation but briefly reversed course due to economic concerns. They then resumed tightening, raising rates by 1,005 basis points in six months. This triggered a severe 16-month recession with a 10.8 percent unemployment rate. The Fed's commitment to tackling inflation eventually succeeded, with inflation declining significantly. Paul Volcker prioritized inflation control over a soft landing.


6. February 1983 – August 1984: Spanning about a year and a half, this episode represented more of a policy recalibration than a tightening, considering the context of recovering from a deep recession and money supply targeting experimentation. Nonetheless, the Federal Reserve consistently raised the federal funds rate, accumulating a 313 basis point increase. During this period, GDP growth was robust, unemployment declined, and inflation remained moderate, around 3–4.5 percent. It marked the early years of the "Great Moderation."


7. March 1988 – April 1989: In early 1988, the U.S. economy appeared healthy, with low unemployment, robust GDP growth, and stable inflation. Under Alan Greenspan's leadership, the Federal Open Market Committee initiated a cautious tightening cycle, raising the federal funds rate by 326 basis points over 13 months. While this cycle had the potential for a soft landing, Saddam Hussein's invasion of Kuwait in 1990 led to a brief recession. Nonetheless, Alan Greenspan's monetary policy was not the primary cause of the less-than-soft landing.


8. December 1993 - April 1995: In 1994, Alan Greenspan led a tightening cycle that is renowned for achieving a perfect soft landing. Beginning in December 1993, the Federal Open Market Committee decided to raise the target federal funds rate seven times over a year. One of the significant hikes was a 75 basis point increase in November 1994. The results were remarkable: inflation remained around 3 percent, unemployment decreased, and real GDP growth stayed above 3 percent. This period marked a rare instance where a soft landing was successfully achieved without external disruptions.


9. January 1999 – July 2000: The late 1990s witnessed robust economic growth, falling unemployment, and low inflation. The Federal Reserve, led by Alan Greenspan, adopted a cautious approach. They maintained the target federal funds rate at 5.25 percent or 5.5 percent for approximately 2½ years and even lowered it to 4.75 percent during the 1998 financial crisis. This tightening cycle resulted in a mild recession known as the "recessionette." Inflation remained in check, fluctuating within the 1.9 to 2.6 percent range.


10. May 2004 – July 2006: The Global Financial Crisis of 2007–2009 stemmed primarily from the housing market bubble and reckless financial practices, rather than the Federal Reserve's monetary policy in 2003–2004. The Fed's rate hikes, totaling 425 basis points, closely aligned with the effective federal funds rate. Several factors, including the timing of the rate hikes and the severity of the financial system's near collapse in 2008, played more substantial roles in causing the Great Recession.


11. November 2015 – January 2019: The last Fed tightening period, spanning over three years, may not be classified as a traditional tightening cycle but rather a gradual normalization of interest rates following years of near-zero rates. Despite a 228 basis point rate increase, the Fed's actions did not cause the subsequent severe recession, which resulted from the COVID-19 pandemic and related factors.














*Source - Blinder, Alan S., 2023. "Landings, Soft and Hard: The Federal

Reserve, 1965–2022".” Journal of Economic Perspectives 37 (1):119.


 Today in 2023, what type of landing are we in for?  As usual with economic activity, only time will tell.


When it comes to time, investors can spend a lot of it getting bogged down in the macro-economic climate.  The market historically has “climbed a wall of worries” and lifted despite social, geopolitical, and economic headwinds. As investors, we cannot afford to ignore macro-economic conditions, however, we also cannot afford to hide out and wait for an all-clear.  All clear signals usually do not arrive without the market moving considerably higher beforehand.


Instead of waiting for an all-clear, we keep scouring the universe for companies that can succeed in most economic conditions.  One of the ways we look to navigate possible landings ahead is gravitating towards companies that are business to business companies (B2B) instead of directly consumer facing companies.  We do this consciously for several reasons:


Not trendy.  We don’t have to navigate trends, fashion, or consumer tastes when we invest in B2B companies.  Staying ahead of the latest trends is nearly impossible for an investor to do consistently. Instead of focusing on what’s “cool,” businesses are looking for providers of efficiency and growth.

Cost of switching.  Most B2B companies have larger customers and switching products or services can be very costly and time consuming.  Being offline is expensive, retraining employees is expensive, management reviewing new proposals and contracts is expensive.  Switching can be expensive.

Mission critical.  Many of the companies we invest in provide mission critical services to their corporate customers that are essential to operating their businesses.  Although a company may reduce numbers of users and add-on services during an expense reduction campaign, there would be many other areas of cost cutting before a mission critical product is considered.

Less emotion.  Consumers can get emotional, especially when it comes to financial decisions.  They can be easily influenced by what their friends and family are buying (or not buying).  The media and world events can also quickly play into purchasing decisions. Businesses, on the other hand, usually have management and boards to answer to when contemplating financial decisions which can lead to slower, more deliberate, and thought-out decisions.

Many operating levers to pull.  Businesses can innovate through downturns and add new product offerings. We’ve seen companies leverage their physical footprint, expand to adjacent markets, or even vertically integrate their supply chain.

Many financial levers to pull.  Corporations have many financial tools in their toolbelt to weather storms.  They can cut expenses, issue debt, issue equity, spin off divisions or delay investment.  Many businesses have teams constantly evaluating these options.

As a result of rising interest rates, a recession may be just around the corner, or we may see the “Goldilocks” scenario that slows inflation but does not impair growth in the economy.  Rather than waiting on the sidelines, we prefer investing in B2B companies that can withstand either scenario.  Constantly striving for efficiency, B2B companies free us from the burden of predicting trends, enjoy a high cost of switching, are usually central to the operations of their customers, are usually less emotional and have many levers to pull, both operating and financial.  When business is the core customer, the B2B provider can usually expect more stability from their customers and thus, more predictability in the revenue stream.  Predictable revenue streams provide the best possible safety belt for whatever landing may be ahead.



Throughout history, the stock market has been a reflection of human innovation. Technological advancements in various sectors, such as medicine, healthcare, transportation, and computing, can be observed through the lens of capital markets. As investors, it is important to recognize that selling out of our portfolios essentially means betting against human innovation—a wager that may prove unwise in the long run.

 Waves of Innovation:

The first wave of innovation began in the late 1700s and was driven by waterpower, textiles and iron. At this time, the Philadelphia Stock Exchange was formed, and the Industrial Revolution was in full force. The second wave began in the mid1800s with steam power, rail and steel, propelling further innovation and industrial advancement. Railroad stocks were the most popular investment at that time. The next wave of innovation was primarily electricity, chemicals and the internal-combustion engine arriving in the early 1900s. Tobacco, steel, utilities and rail companies dominated the trading volume as the euphoria of innovation gave way to exuberance. In approximately 1950, the fourth wave of innovation began with the onset of aviation, electronics and petrochemicals. The “Nifty Fifty” became an informal designation of large companies trading on the New York Stock Exchange and included IBM, Coca-Cola, Eastman Kodak, Sears, Proctor & Gamble, and General Electric. The fifth wave of innovation was built on digital networks and software. Investors gobbled up shares of anything with “Dot com” in its name as the internet became a household tool in the 1990s. Cisco, Dell, Lucent, Yahoo, and America Online were some of the decade’s biggest winners. Many argue that we are entering the sixth wave of innovation with artificial intelligence, robots, drones and cleaner technology.

Interestingly, some of the aforementioned companies have become long, enduring stalwarts that make up the corporate landscape today and some have ceased to exist despite their innovative lead during a wave innovation. This is yet another great reminder that not all great innovators are great investments. Not all great products make a great company. We, as consumers, can love a product or an innovation but we must think differently as investors.

Especially when the markets start to get excited by innovation, it is crucial to stay disciplined and go back to core tenets that lead to successful investing. Vigilantly watching how CEOs, as capital allocators, navigate rapid growth becomes even more crucial during an innovation wave. Prioritizing low capital intensity businesses, particularly in inflationary environments, while also ensuring responsible use of debt by companies must continue to remain at the forefront of investment decisions. Additionally, monitoring competitive threats and regulatory challenges is fundamental to owning businesses as the wave brings with it tremendous and rapid change.

Stock Market Performance:

Back to the present day, in 2023, the stock market has witnessed remarkable performance in the face of much uncertainty. Many professionals argue that the stock market is forward looking and it “prices in” adverse events as it may very well have in 2022 with a 20% decline in the S&P 500. Just as the market sees waves of innovation, it is also expected that we see waves of uncertainty. Last year the market was likely pricing in such uncertainties and economic challenges as:

1.     The war between Russia and Ukraine

2.     Rising interest rates, which inherently slows growth.

3.     Rapid inflation in food and labor costs as the economy rebounded from supply chain issues that followed the Covid shutdown.

4.     Tensions with China that are leading to a largescale, geographic shift in manufacturing.

5.     A banking crisis that led to the demise of three of the country’s larger regional banks.

 New Realities:

The market is beginning to accept these adversities and has begun to look ahead again. Despite these adversities still persisting in 2023, we are seeing some pockets of strength. Some sectors are beginning to outperform as the market once again returns to the power of innovation. Sectors that are seeing inflows of capital seeking innovation:

 1.     Technology: Companies at the forefront of innovation, such as those involved in cloud computing, artificial intelligence, and cybersecurity have

         experienced remarkable growth as digital transformation continues to reshape industries. Technology spending for corporations is essential and

         unavoidable. Having 2022 to test and challenge novice management teams has allowed some companies to emerge stronger.  Managements had to

         weather a tough storm and this fire they have walked through has separated “the wheat from the chaff.”

2.     Healthcare: The healthcare sector has thrived throughout the pandemic as governments increased funding for research and innovation.

        Advancements in pharmaceuticals, biotechnology, and healthcare services continue to propel healthcare investment. Companies focusing on

        innovative treatments, therapies, and healthcare solutions have delivered strong returns over the long term.

3.     Renewable Energy: With increasing global emphasis on sustainability and clean energy, the renewable energy sector has flourished. Solar, wind, and

        other green energy companies have attracted significant capital, driven by growing demand and government initiatives.

4.     E-commerce and Digital Services: The shift towards online shopping and digital solutions has been accelerated, leading to substantial gains for

        companies operating in e-commerce, digital payment systems, and online marketplaces. The convenience and accessibility offered by these services,

        along with Covid lockdowns, have boosted their growth.

5.     Electric Vehicles: The growing interest in electric vehicles and the transition to a greener transportation system have driven the performance of

        electric vehicle manufacturers and related infrastructure companies. Increased consumer adoption and supportive government policies have

        contributed to their success.

6.     Global Manufacturing Shift: With supply chain woes fresh in their minds and as tensions with China escalate, manufacturers are scrambling to move

        manufacturing closer to home. This is impacting real estate, labor and also leading to strong transportation innovation.

 A Bright Future:

We are steadfastly optimistic about the future and the power of human innovation. Waves of uncertainty often create tremendous opportunities to embrace the potential for continued growth and prosperity.  And although we are ready to ride the waves of innovation, we will do so with discipline and unwavering focus on what not only makes an amazing product, but what also makes an amazing investment.



First and foremost, it is important to understand that the US Treasury has backstopped all deposits at Silicon Valley Bank.  Depositors will have full access to their money. Next, it is important to learn from and work to identify the ramifications of these events.

What have we learned? 1) Social media and its power are not to be underestimated.  Depositors at Silicon Valley who were closely watching their Twitter account, were not only quickly moving money out of the bank but were also passing along the panic. In 42 hours, the country’s 16th largest bank was run. 
2) Trying to make large interest rate calls in one direction or another can result in tremendous pain.  Silicon Valley management deployed almost of all their deposits into treasuries and mortgage-backed securities by year end of 2021.  They also selected long maturities thinking that the interest rate hikes were almost over, when in reality they were only just beginning.  Trying to compensate depositors with 3% when you are earning 1.6% was unsustainable. 
3) Never say never. “Black Swan” events can and do happen.  Regardless of the pundits who say they knew it was coming, pandemics that shut down the global economy or bank runs with no defaulted loans can happen and blindside investors.

What are the immediate ramifications? 1) Tighter credit in the short run is likely inevitable.  All banks, big and small, will be forced to take a breath, review their held to maturity securities, their loans, their deposit concentration, and their geographic/industry concentration.  Loans to marginal customers will be delayed. 2) Companies that rely on private debt to operate may also need to delay projects, lay off workers, and rein in spending in the near term.  3) Bank regulation and the cost of bank of regulation will increase. Instead of too big to fail, we may begin to see too small to succeed. 4) The Federal Reserve will need to think more carefully about future interest rate increases.

However, as always, investing is about the long-term prospects of companies and debt issuers, not about the headlines of today.  Moments like these are where the Warren Buffetts of the world make their money.  The greatest investor in the world, Warren Buffett, released his most recent letter to shareholders as the Chairman and CEO of Berkshire Hathaway. We have quoted Mr. Buffett many times throughout our 30 years in this business as he has had tremendous influence on our investment philosophy. In his recent letter to shareholders, Buffett reminds us that he and Charlie are not stock-pickers but are business-pickers and episodically, it becomes easy to buy pieces of wonderful businesses at wonderful prices.  He also reminds investors of his missteps; Berkshire once was a major shareholder of Solomon Brothers which was one of the 5 largest investment banks in the United States and the most profitable firm on Wall Street during the 1980s and 1990s.  The company had to be rescued in a buyout by Travelers Group in 1997 after treasury bond trading fraud.  Another bad investment was his investment in USAir which filed bankruptcy twice in two years.  All investors have investments that were not what they thought were.  As Buffett opined: “Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services.”

The investment journey is always a bumpy one. The outsized returns seen in the stock market are a reward for enduring tremendous volatility and staying the course.  Staying the course isn’t always easy. Large declines in the market including Monday, October 19, 1987, also known as “Black Monday” when the Dow Jones Industrial Average fell 22.65% in a matter of hours was one of history’s most obvious examples of extreme panic.  The Energy crisis from 1970-1980 and the resulting petroleum shortages and elevated oil prices also created tremendous challenges for those navigating the markets. More modern events that substantially rattled the markets include the Great Financial Crisis of 2008 where we watched Lehman Brothers and Bear Stearns fall into receivership, as well as the Dot Com Bubble burst of 2002 when we saw many companies cease to exist like MCI Worldcom and Kmart.  Each of these events ultimately created tremendous opportunity for the Warren Buffetts of the world to add to their wealth.  Likely, we are seeing one of those opportunities unfold now.  According to Buffett: “Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.”

What now? Buffett describes his mandate as, “Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur”.  Similarly, our job is, patience, staying power and level headedness.  As we always do, we return to our core philosophies. We check and recheck our assumptions on the companies we own and the companies we would like to own.  We get out of sinking boats and swim to those that are seaworthy, as Buffett says.  We find managements that are adapting to the world’s new realities.  We scour the universe for great businesses with competitive moats that are intact.  We remain cognizant of not just credit risk but also interest rate risk, inflation risk and liquidity risk as we diversify issuers and maturities for fixed income investors. 
And then we get up and do it all over again tomorrow.



Although 2022 has been an irritating and at times, extremely unlovable market, we at Spence Asset Management embrace the opportunities the volatility presents. Although we too have had the unpleasant experience of seeing our portfolios being valued lower than in previous years, along with most asset classes this year, we have been here before; as George W. Bush would say, this isn’t our first rodeo. We have been shareholders of great businesses for quite some time now, 1992 to be exact, and have been able to successfully navigate several economic cycles and historical events including the Asian Contagion, 9/11, the DOT-COM bubble, the Great Financial Crisis, PIGS crisis, and most recently COVID in 2020. This too shall pass, and our clients will prosper in the long run.


Some of history’s greatest businesses have emerged from similar turmoil and we are diligently learning, studying and dissecting these new businesses. We have a strong culture of learning- constant learning. We believe our ability to adapt to these environments goes beyond possessing skill or intelligence. In the same way we screen for great companies that create shareholder value, our firm is constantly searching for ways to deliver value to our clients that goes beyond financial planning, estate planning and portfolio management. Our belief since this firm’s inception is that we have created a cumulative advantage over other firms, and we remain committed to continue doing so. We believe we will continue to strengthen as well as widen a moat around us as our firm looks to the next 30 years through constant learning and learning faster than our competition.


Along with learning, we believe in the ability to change our beliefs when they are proven wrong or outdated. This takes an enormous amount of humility yet is instrumental; most people cling to what has worked in the past even though the world surrounding them is constantly changing. Blockbuster, Kodak, Enron, and Sears are just a few examples that remind us how important the ability to adapt can be. We are constantly reviewing our assumptions as well as our assumptions that have proven incorrect.


However, sometimes the hardest thing to do is the best thing to do. Jesse Livermore’s “It was never my thinking that made the big money for me, it always was sitting, sitting tight,” is as true today as it ever has been. We apply this philosophy when owning stocks, as we stick with companies that are profitable, whose managements remain focused and disciplined and whose competitive position remains intact. Additionally, we have never, nor will we ever, chase performance (i.e., hot stocks), chase yields (i.e., junk bonds), or chase the latest get rich quickly “new asset class” (i.e., Bitcoin) which is being confirmed yet again as we watch the trial and ramifications unfold for Sam Bankman-Fried and Alameda Research. We believe our willingness to remain patient will continue to build a cumulative advantage for our firm and continue to create value for our clients.


Along with losing their patience, challenging market conditions can quickly cause investors to abandon their disciplines and core philosophies. Although we have adapted and learned a great deal from the various market cycles and have constantly had to recheck our assumptions, we have never abandoned our discipline. No matter the market conditions, we require a strong operating history from our companies as well as a focused, shareholder-friendly management that manages capital prudently. We require a durable competitive advantage and a low capital intensive business with relatively predictable revenue streams. Companies can change, industries can be disrupted, economic cycles can shift, regulations can emerge, but our core discipline will remain steadfast.


Unwavering philosophies are rare as is conviction in those philosophies. According to Morningstar 47% of mutual fund managers DO NOT personally own any of their own fund. Read that last sentence again. This is the equivalent of someone who drives a Rivian recommending their clients buy an F-150 or a Chevy. When we say we understand your frustrations when portfolio values are down, we truly understand, as we own the exact same companies in our personal portfolios. This firm was created to align client interests with advisors’ interests in order to avoid conflicting interests. We remain true to this modus operandi to this day. We eat our own cooking at Spence Asset Management.


Understanding the ingredients of that cooking is crucial to staying patient. We believe once clients understand what they own inside their portfolios and why they do so, they will feel comfortable riding out the storm as well as what to expect going forward. The world is full of smart people but a lot of what used to count as intelligence is now most likely automated and most do not understand how those automated strategies work or what they own inside of them. Along with clear communication of what we own and why, we always take into consideration our clients’ financial picture, their comfortability and their areas of expertise to come to an understanding of their needs and financial goals. We all view life through different lenses and those lenses become a tool in the construction of your portfolio. We do our absolute best to look through those lenses with you.

   No matter the lens, we hope that 2023 continues to bring true wealth for all in the form of health, new experiences, fire-side chats with siblings, friends, and parents. We are grateful to have the opportunity to be more than advisors and cherish being able to call you our friends and family.

Thank you again for your trust in our team. We will work hard again in 2023 to continue to earn that


In the past few years, the rising tide swelled to tsunami-like heights and the TINA trade pushed asset prices to unrealistic heights. Consumer demand drove traditional assets like art, collectible cars, single family homes, vacation homes as well as new assets like crypto currency, non-fungible tokens and meme stocks to eye-popping levels. Pandemic-related shutdowns left Central Banks no choice but to stand by, knowing that at some point, the tide would have to go back out. Here are a few traditional and non-traditional assets that rose to unsustainable heights due to a lack of reasonable alternatives over the past few years:

Real Estate - S&P CoreLogic Case-Shiller Home Price index which tracks residential home prices in cities like Boston, Miami, Phoenix, San Diego, and Tampa, amongst others, reported an 18.8% Annual Home Price Gain in 2021. Since 1891, home prices have increased on average 3.2% annually.

Stock Market - The S&P 500 index notched 70 all-time highs in 2021, a record that is second only to 1995. From April to early December of 2021, Tesla, Nvidia, Apple, Microsoft, Google, and Microsoft, accounted for 51% of the S&P 500’s 26.61% return. The S&P has returned a historic annualized average return of 11.88% since its inception in 1957.

Meme Stocks - GameStop shares rose from less than $5 a share to $325 in January of 2021, in less than six months. In January alone, GameStop gained as much as 1,700%. GameStop was part of the “meme stocks,” which refer to shares of a company that have gained a cult-like following online and through social media platforms.

Non-Fungible Tokens - Non-Fungible Tokens or NFTs are like physical collector’s items, except they are in digital form; they can be bought and sold online and represent a digital proof of ownership for any given item. NFTs enable the tokenization of things like art, collectibles, even real estate in digital form. In February of 2021, Everydays: The First 5000 Days, a collage of 5000 digital images created by artist Winkelmann was sold for $69.3 million; the record for the most expensive NFT ever sold.

Crypto - Cryptocurrencies that launched as jokes, such as Dogecoin and Shiba Inu, became major market players, contributing to the tripling of the total cryptocurrency market in 2021. Today, there are almost 21,000 different coins in existence.

In 2022, the lights began getting turned on. Anyone who has overstayed their welcome in speculative assets is being told by the Federal Reserve that they need to sober up. After more than a decade, the Fed’s Zero Interest Rate Policy has come to an end. The tide began to recede. In an attempt to cool down inflation, the Federal Reserve has started to raise its federal funds benchmark rate.

In March of 2022 we witnessed an interest rate hike of .25%, followed by a .75% rate increase in early May, then .75% again in June, and another .75% in September. Expectations are that the Fed will continue this path until they deem inflation is under control. An end to the Fed’s Zero Interest Rate Policy means that investors finally do have an alternative- an alternative that was not available 12 months ago. They no longer must go to the end of the risk spectrum or into complex alternative asset classes in order to achieve a return. At the moment, the bond market seems to present a viable alternative in the form of high-quality fixed income securities with attractive yields. Capital will always flow where it is treated best. Over the last several months, it has flowed out of equities and crypto and toward treasuries.

Like the tide, capital is always on the move to where it is treated best. As Warren Buffet likes to remind investors, when the tide goes out, we get to see who is swimming naked. Clearly, as the tide goes out, naked swimmers such as meme stocks and crypto currencies are giving back gains and sending ripples of pain through the financial system.

The tide going out has created tremendous pain but also tremendous opportunities. These tumultuous markets and rapidly changing economic conditions have greatly tested management teams of public corporations. They face rising debt costs, they face falling demand, they face employment challenges, they face rising input costs, all while facing never before seen pressure on social issues. We are watching closely to see how management teams navigate this storm and ready to cull any management that is not able to evolve.

How do we want to see a management team evolve in this post TINA environment? Again, in the equity markets, capital will always flow to where it is treated best. 1) We need to see some financial discipline. With sales growth slowing, we need to see that a management team can trim their workforce, if needed, and can increase productivity. 2) We need to see responsible use of retained earnings. We need to see acquisitions that make sense to their core business as well as capital investment at levels that are appropriate in order to balance future growth with current uncertainty. 3) We would also like to see conviction in the future of the business from management. That often comes in the form of share repurchases and insider buying. In other words, is management treating our capital best?

2022 has been a challenging year for management teams and investors alike not only because of the Fed’s monetary tightening and concerns of a resulting recession but also adding to the market’s uncertainty are the elections, the war between Russia and Ukraine, commodity costs, China’s shutdown policy due to COVID concerns and supply chain woes. Like management teams that must evolve in these rough waters, the tide going out is giving individual investors an opportunity to evolve as well. As we transition into a new financial regime it is important to revisit your financial plan, your investment objectives, and your asset allocations. We are happy and ready to do so anytime.


The revaluation was triggered by the anticipation of higher interest rates.  Although we have yet to see dramatic valuation corrections move into most other assets, stocks are very similar to any other asset, like a house or a bond.  As rates rise, the value of that asset declines.  “Growth” companies usually go first in a decline in value during a rising rate environment because the value that a typical acquirer would pay declines in line with the amount of increased borrowing costs on that acquisition.  Younger, smaller, fast-growing companies that have seen dramatic rises in their valuation include a take-out premium, or the speculation that these companies are likely to be bought by older, slower growing companies with a great deal of cash.  In the initial stages of a downturn in the markets, these companies are valued lower because if they were to be bought now, it would cost the older company more to borrow the funds to acquire the younger company.  It is very typical and logical behavior in the stock prices of these companies, although the underlying fundamentals and growth rates of these companies remain unchanged.

We always refer to history when navigating market environments.  And, as Mark Twain said, although history does not usually repeat itself, it often rhymes.   Looking back to the 1970s when we last experienced a prolonged inflationary environment and the Federal Reserve was forced to take action, we do see a bit of “rhyming.”  In 1964, inflation was 1%.  In 1974, inflation was 12% and in 1980, inflation reached 14.5%.  The most recent CPI reading including food and energy was 8.5%.

The late seventies do have some similarities to our current headwinds.  One commonality includes fiscal imbalances.  In the late 60s and early 1970s there was legislation that brought about large spending programs across a broad array of social initiatives at a time when the US fiscal situation was already being strained by the Vietnam War.  Today, fiscal policy has dumped tremendous amounts of stimulus into the hands of Americans.  Both fiscal explosions led to a higher than normal level of spending that is in excess of what the economy could produce.  Another similarity between these two periods includes a Federal Reserve that was being too accommodative.  In the late 60s and early 1970s, the Federal Reserve was holding interest rates steady instead of adjusting to the rising prices.  Leading up to the current period, the Federal Reserve continued to “ease” or institute large buying programs of treasuries to keep rates low.  Finally, a common culprit of the inflation in the 1970s was the energy crisis resulting from an Arab oil embargo that began in October 1973 and then the Iranian revolution in 1979.  Similarly, unrest in Russia and Ukraine as well as policy changes regarding fracking and oil & gas exploration have led to rising energy costs, although at smaller magnitudes.

However, there are some key differences between the 1970s and the current situation as well.  A rarely discussed difference between the two eras is the Bretton Woods system and the anchoring of the US dollar to gold.  Bretton Woods was a system formed globally to bring economic stability and promote global trade during World War II which fixed currency exchange rates and linked the US dollar to gold.  As the supply of dollar reserves soared abroad and exceeded the US stock of gold, it became clear that the tethering was contributing to inflation.  The most notable difference in today’s inflationary environment versus the 1970s is the Covid pandemic.  The pandemic led to shutdowns in manufacturing, shipping gluts and severe labor shortages.  Another important difference would be the Federal Reserve’s use of public expectations.  Today, the Federal Reserve uses communication and expectations as part of their “tools” to manage the economy and achieve their mandate.  It took many years of double-digit inflation before the Federal Reserve would begin to take action in 1979.  Today, the Fed has begun aggressively “talking” inflation down.

Overall, we believe in both situations, the Federal Reserve has found themselves between a rock and a hard place trying to maintain price stability but also maintain full employment.  So, how do we navigate an inflationary environment that is requiring some Federal Reserve action?  One of the key advantages of a company that will result in surviving and thriving the resetting of asset prices is pricing power.  This is one of the requirements for our holdings in that we scour the stock universe in search of companies that have the ability to raise prices without losing market share.  Companies will need to raise prices in order to pay their employees more, matching what other companies are paying their employees in order to retain key personnel.  Companies also need to cover higher input costs, higher travel costs, higher energy costs and even higher food costs.  As we hunt for companies that can maintain market share, we look for companies that are ingrained in our daily lives, either directly as consumers or indirectly through business-to-business suppliers.  We look for companies with high switching costs or very little competitive alternative so that retention of customers is highly likely.  Likewise, we like to see products or services that are necessary for their customers, regardless of the economic environment.  All of these factors contribute to a company’s ability to raise prices.

Another important tenant in our investment philosophy is a low capital-intensive model.  Inflationary environments are when the advantages to these types of companies really shine.  A capital intensive model like a manufacturing company will see their costs rise more quickly than a low capital intensive entity like a software company.  The manufacturer will have to replace/update expensive machinery at higher prices (and perhaps face delays in receiving the equipment during shortages and shipping challenges).  The manufacturer will have to handle higher input costs, higher energy costs as well as higher labor costs.  And if the manufacturer is forced to raise prices any faster than its competition, they will lose market share.  Again, this takes us back to pricing power.  We must stay focused on companies that can pass on price increases without losing market share in any environment.


 Some perspective on inflation seems appropriate. Much has been written on the topic of inflation since the printing press was invented in the fifteenth century. Inflation is intricately woven into the fabric of both macro and micro-economic forces. We are reminded of what Dr. Thomas Sowell, one of our all-time favorite economists, says regarding economics and inflation. The first lesson of economics, according to Sowell, is based on the idea of scarcity: “There is never enough of ANYTHING to satisfy all those who want it.” Sowell often paired the first lesson of politics with the first lesson of economics. “The first lesson of politics is to disregard the first lesson of economics.”

 Not just scholars have noticed politicians in both political parties disregarding the first lesson of economics. At the end of the day, politicians all along the philosophical spectrum recognize that it is far more palatable to simply print money than to encourage economic growth to alleviate scarcity. Those politicians who do not recognize this fact, are rarely elected let alone re-elected. It is truly a fundamental bi-partisan truth. And the printing of money ultimately leads to inflation, a fundamental economic truth.

 Since our profession requires us to face daunting realities rather than delve into the theory of public policy debates, we refer to historians Will and Ariel Durant. The Durant’s were awarded the Pulitzer Prize for General Nonfiction in 1968 and the Presidential Medal of Freedom in 1977. These prolific scholars wrote eleven volumes of The Story of Civilization. This remarkable treatise on human history, which was published between 1935 and 1975, was an epic study of both trends and human tendencies. Near the end of their lives, the Durant’s sought to unify the great body of their historical knowledge and bring vitality to it for contemporary application when they wrote a one-hundred-page masterpiece entitled, The Lessons of History. Having studied fluctuations in prices and those participants who adapted best, the Durant’s concluded: “History is inflationary and money is the last thing a wise man will hoard.”

 What did the Durant’s mean by saying “money” is the last thing a wise man will hoard? Is this investment advice? What we believe they meant by this conclusion was that hoarding excess cash is a losing proposition in the long run.

 Case in point: consider the hopefully soon to be first time home buyers from a few years ago. Millions of young Americans diligently saved a significant portion of their income for a down payment while earning virtually no interest in their money market savings accounts. Sadly, the price of homes, thanks to the vagaries of inflation, rose much faster than they could save. This lamentable situation continued right through the pandemic. It turns out hoarding cash in an inflationary environment was the worst thing that could be done.

 What do we think about inflation right now, and what are we doing about it?

 The inflation rate is both cause and an effect. Inflation reduces purchasing power, however, owning assets that mitigate the effects of inflation and actually appreciate at a pace that diminishes the damage to the purchasing power can reduce the effects of inflation on our stored wealth.

 Unlike the savers who hoarded cash, those who have owned well-selected stocks and real estate have been somewhat insulated from the gradual acceleration in inflation in recent years.

 Ultimately, inflation creates a negative force in the macroeconomic equation for all participants. However, the negative impacts of inflation are not evenly distributed. Investments in bonds, which generally produce fixed rates of return, offer very little, if any, inflation protection. This is especially true in a bizarre near zero interest environment created by policy makers. On the other hand, investments in assets with superior investment characteristics can and do provide satisfactory returns, even in accelerating inflationary environments.

 Inflation increases the breakeven figure for purchasing power calculations. Simply put, for investment capital deployment decisions to result in a mitigation of the negative effects of inflation, the returns attributable to the assets owned must rise at least proportionately to the rise in the inflation rate. And purchasing power in the future will suffer when returns on equity diminish and advance at a rate that is less than the future inflation rate. This is why increasing returns on shareholder’s equity are so valuable, all else being held constant.

 Understanding the mathematics of inflation is the easy part. Identifying the financial characteristics of companies that can outpace inflation is critical. Characteristics that give us the best chance to prosper during inflationary periods involve many variables.

 So, what are the basics? For decades we have structured our thinking around the recognition that, “History is inflationary and money is the last thing a wise man will hoard.” All of the processes we engage in to address this problem could be the subject of a book not a newsletter. So, let’s just mention a few here:

 1. We AVOID capital intensive industries where profits must be plowed back into buying increasingly expensive equipment to operate the business that must be continuously modernized at ever higher prices while competitors do the same.

 2. Identify companies with the ability to pass on price increases. The more pricing power a company has and the easier it is to raise prices during inflationary environments the better.

 Naturally, there are other “boxes” a company must check in order to make the grade. We look at management tendencies, unit volume and revenue growth, profit margins, return on invested expenses, return on shareholder’s equity, consistency, durability of competitive advantages etc. However, in the end, we begin with the idea that “history is inflationary” and we must identify dominant, low capital expenditure companies, with pricing power.



It is enlightening to pause and consider how the both the terms “art” and “science” have been historically construed. We tend to think of the term, “art” as being quite abstract and centered in free-wheeling creativeness. Alternatively, the term, “science” is thought of as a concept steeped in facts and empirically verifiable data. The perception is strong that “science” requires a study of only things that are measurable. Ultimately, the seemingly generalized terms of “art” and “science” reside at opposite ends of the conceptual spectrum regarding human knowledge. Consider our perceptions of modern art versus modern science as an illustration of this point; modern science continues to produce astonishing and indisputable advancements in living standards, while modern art’s advancements or lack thereof, are endlessly debatable.

Still, at universities all around the world, Colleges of Arts and Sciences tend to be quartered under one roof. At first glance this seems odd. Or does it?

When asked to explain our successes in the area of portfolio management, we have often suggested our methods can best be defined as the result of the application of both art and science. The dissection of balance sheets, income statements, and cash flow statements reflects the most scientific aspects of what we do. After all, balance sheets….are….well…..they are required to “balance” mathematically. Alternatively, forming well-informed opinions regarding the existence of and particularly the durability of competitive advantages of a business is mostly an art form.

With art, it is often said that “beauty” is in the eyes of the “beHOLDER.” In equity investing, which is long range process, the beauty (and success) of a given business model and the skills of the management team running it, is determined by the collective decisions of present and future “shareHOLDERS.” Whereas current profits and current rates of return for investors are quantifiable, FUTURE profits and FUTURE rates of return on shareholder’s equity are notoriously difficult to forecast.

The biggest problem associated with forecasting investment results is the number of potential variables that can and do come into play. While graphs and charts depicting the impact of the forces of supply and demand are relatively easy to produce, identifying and quantifying all of the most critical factors associated with possible investment outcomes can be almost infinite and often times not measurable.  Art or Science?

We embrace both the artistic and scientific requirements necessary for successful portfolio management. Much like the nature of energy as well as the nature of information transmission, the fields of finance and investments are bound by fundamental truths. Like the laws of gravity and general relativity, the need for capital expenditures, the existence of pricing powers, and the addressable market sizes govern investment considerations. The potential for unseen variables, (pandemics, political revolutions, and natural disasters) can modify even our most basic assumptions simply because they are always possible.

In the end, the fields of both art and science continue to evolve. The future figures to always be vague and difficult to define. While the fundamental truths contained in “laws” of some areas of science, such as Thermodynamics, remain fixed, the advances in human knowledge can best be described as a never-ending expansion.  History teaches us that the need for accurate information in human processes has always been crucial. On the other hand, the evolution of tools used for improving information technologies, are continuously pushing the limits of scientific frontiers. Anticipating the impacts of developments on the scientific frontiers and how they will affect global economics and particularly micro-economics is likely to remain at best, a blend of art and science.


The nation’s GDP, or Gross Domestic Product, is an economic statistic that involves an estimate of the annual gross value of domestic output from economic activities. Sixty years ago (1960) the United States economy generated GDP of around $543 billion. In last year’s pandemic afflicted economy, U.S. GDP was approximately $21 trillion. Doing the simple math, essentially, the U.S. economy is 40 times larger than it was sixty years ago.

One would expect the benchmark United States stock market index, the S & P 500, which was created in 1957, to also have grown in value by roughly 40 times since 1960. However, the index numbers do not quite reflect a one-for-one correlation with GDP numbers. At the beginning of 1960, the S & P 500 Index stood at 58.03. By the end of 2020, the index had grown in value to 3,756.07. So, while the U.S. economy grew 40-fold over the last 60 years, the S & P 500 grew 65-fold during the same time frame.

There are many factors involved in explaining why the S & P 500 value grew faster than U.S. GDP. The primary reason is that the S & P 500 is not a static index. The component companies in the S & P 500 have changed dramatically over the last sixty years. No longer part of the U.S. corporate landscape are companies such as Trans World Airlines, Pan Am, Woolworth, Sears & Roebuck, Compaq Computer, Lincoln Savings and Loan, Lehman Brothers, and Eastman Kodak. Dozens of other former corporate powerhouses have long ago seen their finest days. Companies that once dominated their segment of the U.S. economy and perhaps the global economy, have sought re-organization protection under U.S. bankruptcy laws causing shareholder investments to be virtually wiped out. Think of General Motors, Chrysler, K-Mart and many others.

Companies rise to greatness then fall to obsolescence, yet the earth continues to spin. Today, we are in the midst of 1st quarter 2021 earnings reporting season. Four times each year, companies we hold shares of report quarterly results and conduct question and answer sessions during their conference calls. Companies release mountains of information regarding the most relevant aspects of their operations. Combing through relevant information provided by our management teams each quarter represents a cornerstone of our expertise. When we are considering a new idea, we also delve into previous conference calls looking for relevant data, in addition to pouring over financials and scouring the competition.

When we are explaining our approach to vetting and selecting common stocks for investment, we often summarize these activities by saying that we, “spend the vast majority of our energies at the micro level.” What this basic statement means is that we focus on a wide variety of factors and how they affect individual companies, rather than more general factors that tend to have an influence on the broader economy.

To illustrate the reasons why we direct our energies to the micro level, let us briefly explore a few important facts regarding the S & P 500. First of all, as we move forward in 2021, some of the largest companies in the S & P 500 simply did not exist back in 1960. Microsoft, Apple, Google, Amazon, and Intuitive Surgical are some examples of newer members to the index. Each of these profoundly successful companies were founded long after the inception of the S & P 500 Index back in 1957.  Staying focused on the individual companies and not on an industry or an index keeps us focused on the most relevant companies of our generation.

Next, as evident in the first quarter of 2021, several of the companies whose shares are held in our Focus investment accounts have already reported stellar results that have exceeded our expectations but have not yet been rewarded for those phenomenal results. What does this mean to us? For starters, it is quite a misnomer to think that companies reporting significantly larger shares of the $21 trillion U.S. GDP pie will immediately see their share prices rewarded with increases in value immediately after results are reported. Markets move about day-to-day, month-to-month, quarter-to-quarter, and even year-to-year, based on the whims of the masses as well as various underlying economic conditions. Market prices of shares of individual companies routinely move both ahead of (or behind) the fundamental realities of their underlying businesses. Assuming that there will be an immediate reflection of successful competitive results requires the embracing of a myth. Additionally, expecting immediate reflection of a declining competitive position in share prices, is also a myth. There are too many distractions available for those seeking guidance from media sources. It is logical given these realities that the markets are constantly producing false signals.

Despite these false signals however, as sure as night follows day, over the long run, the shares of once leading companies that begin to fail in their respective micro-level competitions, like the K-Marts and the Sears, will eventually become mired in subpar share value performance or even bankruptcy. Alternatively, as day follows night, the shares of companies that can and do sustain above-average operating progress, will significantly reward patient investors as they grab a larger share of the $21 trillion U.S. GDP pie.

Thus, we devote our finite energies at the micro level because we are very uncomfortable relying on rises in global or domestic GDP or worse yet, false market signals to carry us to success. Companies like TWA, Eastman Kodak, and K-Mart operated during eras when both U.S. and global GDP was rising. And the markets gave off many false signals regarding their eventual competitive destination. However, the quarterly and annual results over time of those companies did not.

The key to our continued long-term success will be to work diligently to process relevant information properly at the micro level, not just quarterly but daily. This means continuing our efforts to identify and hold shares of companies with favorable financial characteristics and competitive advantages who continue to deliver results regardless of the direction of GDP; we must accurately forecast that their advantages are durable in an ever-changing competitive landscape.

Finally, once we do make a decision to commit capital for investment, we understand that we must continuously monitor our assessments of their favorable attributes every business day in case the validity of our assumptions shows flaws over time.  With only 94 companies still in the S&P that were in the original S&P, a company’s fundamentals can and often do break down over time.

With these distinct processes in mind, we are content with gathering facts during earnings seasons without seeking the fickle affirmations (or lack thereof) provided by financial markets. Financial markets, heavily influenced by the news media, and now social media, often behave like children. Childishness involves limited perspective and short attention spans. These tendencies serve as forces that are counter-productive to astute analysis and profitable investment decision-making.



Invariant Theory is the study of orbits of groups.  Given one set of variables, an” invariant” does not change.  But in another set of variables, it takes on a different value that then remains unchanged within that set of variables.  The theory explains the change in algebraic expressions that change in a specified way under linear changes of variables.

Successful equity investing is most certainly NOT rocket science or the proper application of Invariant Theory. However, like Invariant Theory, an investment will likely behave in a certain manner given a certain set of variables or within the “orbit” of, say, rising GDP, falling interest rates, and a low inflationary environment.  But jolt the investment into an entirely new set of variables, like a global pandemic for example, and its behavior is likely very different.  And, like Invariant Theory, there are layers of abstract thought required to navigate the maze of information supplied by all forms of media regarding the financial “markets.”  As Einstein did, we stand on the shoulders of the giants who have successfully navigated the financial markets over time in order to assess our current set of variables and find investments that will prosper in almost any set of variables.

Each year in late February, we log on to the Berkshire Hathaway website and read the latest observations from two of those said giants: Warren Buffett and Charlie Munger. A significant portion of what we have learned over the years has come from reading the deepest thoughts of both Buffett and Munger regarding investments.

Like Buffett and Munger, we see our roles as equity managers not as stock market experts, but primarily as business analysts. While active traders and the media personalities tend to think of shares of stocks as poker chips, we see them as a collection of carefully selected businesses of which we own a portion. Of course, we do not oversee or in any way control the operations of these companies. However, we do benefit from long-term prosperity they generate.

The “orbits” or the variables that surround the financial markets have shifted tremendously throughout history.  Through wars, medical advancement, inflationary environments, political instability, terrorist attacks, technological advances, and recessions, businesses have prospered.  Buffett and Munger have always focused mainly on the potential of their businesses, not on the set of variables they are operating within or on trying to predict what the next set of variables may be.

Quite often the factors that make businesses not just successful, but great investments, can seem buried beneath the surface. In our day-to-day efforts, which are out of our client’s field of view, we spend our time furiously digging. We mine income statements, cash flow statements, and balance sheet data. We plow through conference calls which are conducted by the management teams running the businesses we own shares of. We drill into the competitors of companies we are considering, their financials, their managements and their communications as well.  Our goal, like that of Buffett and Munger, is to unearth insights regarding the status and trends associated with a company’s competitive advantages.

Even when we can identify companies with competitive strengths today, often we will see these strengths erode sooner rather than later. Some of the most heated debates in our investment discussions are over the question of “durability” when it comes to competitive strengths.  How will these competitive advantages hold up when the variables shift to a new orbit?

And the variables do indeed continue to shift.  We have moved into the orbit of “stay at home.”  We have moved into the orbit of a new administration.  We have moved into the orbit of tremendous stimulus being injected into our financial system.  The competitive advantage digging persists.

The variables will continue to shift.  For clients just getting started with Spence Asset Management in our Focus Equity Program as well as those who have been in the program for decades, the future is unknown.  The future is muddy, and it has always been that way.  Rest assured that our “shovels” are not resting. We appreciate your business, your loyalty, your patience, and your friendship.


















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