Where to begin with 2020? There’s not much to say that hasn’t already been said, and most are quite happy to say goodbye to a year that saw a global pandemic wreak havoc medically, economically, and socially. Of course, the pandemic is far from concluded and in the northern hemisphere there is a difficult winter to navigate ahead of some benefit – hopefully – from vaccines and a return to outdoor activity. There are still many uncertain bridges to cross before we approach herd immunity and can begin to contemplate life returning to some semblance of “normal.” Despite the rollout of two vaccines in the United States, and other candidates likely to follow, it will not surprise me if some restrictions are still considered necessary and prudent by the time we get to the 2021-22 winter. Economically and socially, 2022 is more likely to be the year in which we can finally begin to put the pandemic behind us.
As a brief aside, I’ve seen the word “unprecedented” used a lot in the last nine months. Maybe that’s true, though we’re often prone to viewing difficult contemporary events as if they are unique to us. When I see “unprecedented 2020” I immediately think of 1918. It’s hard to imagine dealing with a global pandemic in the midst of a world war, with a lack of resources due to all labor and capital being directed toward the war effort, without the communication technology we have today, without the biotechnology we have today. In the midst of the chaos, fatigue, and uncertainty of 2020, we still have much for which we can be grateful.
And we at Bluestone are indeed thankful to have survived 2020. All of our clients are business owner-operators. In March, I was quite sure we’d lose clients over the course of the year. Through dumb luck, it happens that we have few clients in hospitality-related sectors. Those that are in the worst-affected industries were able to respond quickly, and with government help were able to reorganize their businesses to respond to far lower levels of demand. Most of our clients were able to muddle through, and some benefited from strong backlog or favorable shifts in demand and therefore recorded strong financial results for the year.
A year ago, I wrote a post called Reflections on 2019 – and Why our Unusual Business Model Works for Clients (no, the title for today’s blog isn’t terribly original). In that piece a year ago, we talked about some of the activities (e.g., re-allocating monies in traditional investment accounts to other investments like private real estate and private business) in which our clients had engaged. We talked about how those activities result in loss of revenue for advisors employing the asset-under-management (AUM) fee model. We said:
“We continue to choose the fixed fee model as a preferred way to advise entrepreneur families on the full range of opportunities available to them. 2019 highlighted why.” Well, ditto for 2020. Some clients needed to use reserves held in investment accounts to shore up business balance sheets. Others, once again, found opportunity in private real estate. We, once again, were able to do what we do best – advice, strategy, and planning – without being entangled with concern for our own fees and revenue.
Recently, investment manager GMO penned a paper called “Tonight we Leave the Party Like It’s 1999.”1 In that piece, GMO made the point that value investing is something of a paradox: an amazing investment model, but a horrible business model.
I feel similarly about our fixed fee, consulting-like approach to advice: an amazing model for entrepreneurs, but maybe not the best business model (at least, as compared to the AUM approach) for us. Still, I’ll accept lower operating leverage in our business in exchange for being able to opine freely and candidly as to what’s best for our clients.
Finally, we cannot write a note about 2020 without referencing the remarkable year in financial markets. Maybe this is an area where the word “unprecedented” does apply, since by many valuation measures the major U.S. stock indexes now sit at exalted levels higher than those of 1929 or 1999. Steering clear of the pricey stuff has not been a winning formula for several years, and certainly was not in 2020! As James Mackintosh wrote in the Wall Street Journal recently:
“The danger for those of us calling out frothy markets isn’t only that high prices could be justified by fast-growing profits, but that bubbles can always become more extreme. If you doubt that, just look at 2020.”2