Jack Puelicher’s 1982 Letter To Shareholders

In 1982, Jack Puelicher, the CEO of Marshall & Ilsley, wrote an annual report which read, in entirety, as follows: “Your company had a very good year in 1982. Some of it was due to luck; some of it was due to good planning and management. We hope you enjoy the numbers and the pictures.”

I loved how Puelicher followed Shakespeare’s wisdom in that brevity is the soul of wit, and I also like the acknowledgement that luck played a role in his investments. With stocks in the S&P 500 up over 20% on average, it is easy for most of us to look in the mirror and see the visage of Warren Buffett when we look back upon the movements of our own investments in the past twelve months. It seems that the only way you could have lost money this year is if you owned large amounts of silver, gold, and short funds (I’m not a precious metals guy, and don’t anticipate I’ll ever be because of the opportunity costs of owning metals relative to excellent companies is substantial over the long-term, but if someone handed me $100,000 to speculate for five years and I had to divide it up into ten co-equal parts, I’d probably buy $10,000 worth of silver as part of the speculation).

Anyway, with stocks up over 20% this year, I think it’s a good time to refocus on the fundamentals. It can be easy to fall into the trap of letting cash positions fall, stock holdings get more speculative in nature, and to get lazier with valuation by purchasing companies like Hershey that are trading at 30x earnings on the theory “Aww, what the hell, it will all work out eventually.”

No. Now is not the time to get lax in how we make decisions. Although we never knew when the next recession or substantial stock market decline may arrive, it cannot hurt to prepare for it—intelligent investors are always prepared when adverse conditions arrive.

Ask yourself: If you knew that the price of any of your stocks would fall 50% in the next year, would you sell? I don’t mean that in the sense of selling to forestall the loss, but rather, would you sell because you don’t have enough faith in the long-term earnings power of the firm?

If Johnson & Johnson fell to $45 per share, I’d rejoice. It would be a once in a lifetime buying opportunity. Look at your portfolio and honestly ask yourself, “Are there any holdings in my portfolio in which a substantial loss would freak me out and make me sell?” If the answer is yes, no big deal, it means you don’t have a high conviction/understanding of the company in question, and you’d probably be better off selling it now and putting it into companies whose business models are so clear that you have no doubt that you’d hold on through a steep drop. If you do that successfully, the world is yours. You’ve won. You’ve put yourself in a position to know that you will capture something akin to the 10% annual returns of the stock market because you won’t make the dumb mistake of selling low. That fact alone will put you ahead of so, so, so many people.

After the Fidelity Magellan Fund started to have a string of successful increases, some people close to Peter Lynch said that he developed a short-term God Complex, in which he thought that any stock would go up simply because he bought it. Peter Lynch is an amazingly humble guy, and one of the nicest people in the world. But even he was susceptible to the overconfidence that can accompany excessive stock market performance.

This was a great year in the stock market. It’s okay to buy some nice champagne for New Year’s. But don’t let the excellent performance in the stock market affect your preparation, standards, or common-sense judgment ability. Know how much cash you’d want to have on hand in a crisis. Make sure you understand the businesses you own. Focus on high quality. Focus on at least reasonable valuations and don’t buy a stock if it is trading at a higher valuation now than it did during the dotcom bubble. Stick with common sense.

We had a very good year in 2013. Some of it was due to luck; some of it was due to good planning and management. Don’t confuse yourself into thinking this year’s success was all of the latter, and you’ll be fine. Redouble your commitment to common sense, cash, high-quality companies, and businesses you understand. Use this year’s gains as a launching pad of seed capital for future gains. And the best way to ensure those future gains is to keep your focus.