Quarterly Commentary

January 3, 2017

The U.S. stock market finished 2016 with a flourish. The S&P 500 Index was up 3.82% in the fourth quarter, turning 2016 into an outstanding year in which the Index gained 11.96%. Given the rally started the day after the election, it is fair to attribute the year-end advance to the unexpected victory of Donald Trump.

The upturn in the market makes sense. Initiatives the President-elect promised during the campaign, taken in a vacuum, are a cornucopia of investor and business goodies. Dramatically lower corporate taxes, lower taxes for individuals across the income spectrum, extensive roll-back of regulations in key industries, tax friendly policy to spur repatriation of billions in corporate profits stranded overseas, major fiscal stimulus for infrastructure. While these directives hardly restore the no holds barred capitalism of yesteryear, latter day Vanderbilts, Rockefellers, and Carnegies are toasting the arrival of Trump for good reason.

But actions don’t occur in a vacuum. The global economy is a complex network where a tug at one end of the structure can cause an unraveling at the other end. Already, exuberance over the Trump election has led to a sharp jump in interest rates here in the U.S. A virulent rally in the dollar followed, carrying implications for both mature and emerging economies. Domestically, companies that rely heavily on international sales are scrambling to protect profits generated overseas. Tax, regulatory, and trade policy, normally sleep inducing subjects, are likely to command full attention in the months and years ahead. Our futures ride on the rationality of the changes that are evidently at hand.

On November 5th, the Harvey Investment Company moved its offices to 297 North Hubbards Lane, Suite 102, Louisville, Ky., 40207. The move went entirely as planned, and we are well settled. My chief responsibility in the moving process was to pack up files for the movers. In performing this task, I encountered newspaper articles clipped from journals spanning forty years.

One particular piece captured my attention: "Waiting Game" which appeared in the London Financial Times in 2012. It is essentially an excerpt from a book by Frank Partnoy titled, Wait: The Art and Science of Delay. On the book’s cover is a dog with a doggie treat balanced on its nose. The dog’s name is Maggie. She has learned that if she balances the treat for fifteen seconds without scarfing it down, she will get two more treats.

The book is full of anecdotes that illustrate the importance of considering carefully the time required to fully grasp the ramifications of an action under consideration. To open the topic, Partnoy reminds us of the famous tests at Stanford University’s Bing Nursery School, where a group of four year olds are presented with a marshmallow. They are told they can eat it immediately or wait fifteen minutes and, instead, get two marshmallows. The group was tracked through the years. It was found that the kids that delayed gratification as four year olds performed better on standardized tests in high school, were less prone to impulsive behavior, and were more likely to become successful, emotionally well-adjusted adults.

The book details a rich trove of entertaining and pertinent case studies. We see why Novak Djokovic has the best return in tennis and why the pitcher’s mound is sixty feet six inches from home plate. We are told that the mere suggestion of a fast food restaurant heightens our sense of impatience and that timing is all important in determining the effectiveness of an apology.

But hold on! This is an investment letter. So what’s in the book for investors? A lot, I think. Sections relating to professions requiring quick, decisive actions are especially instructive. Firemen, emergency medical teams, fighter pilots, and military commanders on the firing line must make accurate judgements in situations where lives, including their own, are in the balance. Often they must make them under suffocating time pressure. To make such snap judgements without catastrophic consequences, they must be experts in their field and have experienced every imaginable condition. And, then, out of the blue, comes the unimaginable. The real pros have the presence of mind in crisis to recognize and accept when they are in unfamiliar territory. They have the self-control to suspend judgement and action even in the midst of chaos. They wait for more information.

Fortunately, we are rarely required to make snap decisions, and no one’s life depends on us. Nevertheless, your financial well-being depends on us being right the great majority of the time. Avoiding activity in areas where important investment variables are unknowable is key to eliminating mistakes. For example, investors have navigated uncharted water ever since the US and European central banks drove short term interest rates to zero to battle intense deflationary pressure. What are the long term ramifications of these policies? How much have they distorted investment behavior? How should investments be valued when borrowing costs are negligible? We will avoid investments that require answers to these questions to reach a firm conclusion on their attractiveness. We will wait until implications of this era of near zero and negative interest rates are more fully realized.

For this New Year’s Resolution, we suggest investors heed the final word of Frank Partnoy’s book, "If I am limited to just one word of wisdom about decision making for children born a hundred years from now, people who will have all of our advantages and limitations as human beings but will need to navigate an unimaginably faster-paced world than the one we confront now, there is no doubt what that one word should be."

"Wait."

Happy New Year!

Sincerely,
Samuel Harvey
Samuel C. Harvey

In compliance with Rule 204–3 of the Securities and Exchange Commission, we are pleased to offer you upon request and without charge a copy of Part 2A of our Form ADV. This disclosure document contains information about the business practices and procedures of Harvey Investment Company, LLC. Please call us at (502) 339–8270, if you would like a copy.