March 2024 Quarterly 

Dear Clients and Friends:
Re: Q1 Investment Review

The first quarter of 2024 proved to be much better for the stock market than anyone anticipated. In the first half of the three-month period, the Magnificent 7 and their ilk led the rally upward. However, in the second half of the period, better performance was generally provided by the less technology or Al sensitive. It appears that the sorting out of the true winners from the rest has begun, as it inevitably does, sooner or later.

NVIDA still has a lock on the market for high powered chips used in Al processing but Tesla seems to have run into some kind of a ceiling as the initial rush for their vehicles seems to be over. This is further exacerbated by Chinese manufacturers threatening to sell electric cars in the U.S. for $11,000 to $12,000.

And while NVIDA runs free at the moment, competition for the Al chip market will also eventually appear and those still piling into NVIDA at today’s sky-high prices and valuation may eventually be disappointed. We can’t buy yesterday’s performance. Someone else already owns it.

Benchmark Index Total Returns	Year to Date Ending 3/31/2024
Lipper Balanced Fund Index	5.05%
S&P Dividend Aristocrats	6.42%
S&P 500 Stock Index	10.56%
Russell 1000 Value Index	8.99%
3 Month U.S. Treasury Bill Index	1.28%
S&P 7-10 Year U.S. Treasury Bond Index	-1.47%
S&P U.S. Gov & Corporate 30 Year Bond Index	-4.24%

The Psychology of Investing

An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognize that they are the same.

– Daniel Kahneman

Daniel Kahneman, the pioneer of behavioral economics and a Nobel Prize winner, passed away recently on March 27 at age 90. Kahneman, along with his research partner Amos Tversky, showed and tried to explain why people do not always behave “rationally”. Their work focused on the ways in which people are suboptimal in their judgment and decision-making. For example, a patient is much more likely to undergo surgery if they are told that the survival rate is 95% than if they are told the mortality rate is 5%. Until Kahneman came along, economists assumed that a rational person would make the same choice regardless of how the question is phrased. Kahneman and Tversky showed that was nonsense and set out to explain why that isn’t always the case. Context matters.

I think one of the major results of the psychology of decision making is that people’s attitudes and feelings about losses and gains are really not symmetric. So, we really fee! more pain when we lose $10,000 than we feel pleasure when we get $10,000.

– Daniel Kahneman

When it comes to investing, money lost is not the same as money gained. Kahneman once asked conference attendees the following question: if you have the chance to win $100 on a coin toss if it comes up tails, how much would you have to win on heads before you’d take the bet? The “rational” conclusion is that the bet is worthwhile if the amount on heads is any amount over $100 because the expected value is greater than zero while the odds remain the same. However, most of the people in the room said the bet was only worth it if the offsetting or winning amount was $200 or more. Intuitively we know this is true, that it would take more than a $101 potential gain to offset the 50/50 odds of a $100 potential loss.

It is this basis of behavioral economics which forms much of the foundation of how we invest at LIM. We believe that at its core your portfolio should allow you to sleep well at night, without being overly concerned about the gains and losses in the market or your individual holdings over the next day or week or month. The way our portfolios are structured leads them to generally lag a bit when the market is rising. While our positive return in the first quarter is nothing to balk at, the return for most clients was below the S&P500 return of 10.6% for the quarter. However, risk and returns are a double-edge sword. Our portfolios are also designed to hold up best when the market is falling, and this is when we tend to have our best performance relative to the market. This is important precisely because of the behavioral insights laid out by Kahneman. We believe the comfort provided by a portfolio that feels more secure when the market is down is well worth the trade-off of higher returns when the market is going up.

Perhaps more importantly, a portfolio that holds up the best while the market is falling helps keep us from making irrational investment mistakes, the worst of which would be selling after the market has already gone down. During the last substantial market drops during Covid (2020) and the mortgage crisis and subsequent recession (2008-2009) nearly all of our clients did not need much convincing to stay the course and sit tight. While recovery took a little while, everyone who remained invested ended up better off within a few years as the market recovered and, eventually, reached new highs. It was the small number of clients who insisted on selling even a small amount of stock at or near the bottom who took much longer to recover.

Taking a longer-term view of investing allows us to ignore a lot of the daily noise, or volatility. Kahneman did not recommend counting your money every day, as it will make you miserable, advice we often give to clients albeit with slightly different wording. But as investment managers it is a part of our job to live the ups and downs and follow our portfolios on a daily basis. We do our best to tune out the daily fluctuations that occur no matter whether there is any particularly good reason for the rise or fall.

Rather than focus on daily fluctuations, our long-term focus allows us to redefine risk as the chance that a holding goes down and never comes back up. It is the potential for a true loss of principle that gets our attention. Investing in very high-quality companies with solid balance sheets and positive cash flow helps to mitigate this risk, as does our focus on companies that pay dividends and provide us with at least some small return in cash on a quarterly basis.

Investor caution seems to be growing recently, though we do not have any great insight into what the next few weeks or months will bring for the market or any individual holdings. In the short term it nearly always seems that times are uncertain. When the market is up, we worry that it is going to turn down. When the market is down, we worry that it will take a long time to recover or that maybe some of our holdings will go under. Shifting the perspective to the long term can help with these uncertainties. In looking ahead to the next few years, we are generally confident that our clients are much better off investing in stocks rather than cash or bonds and historical data firmly backs this up. In the meantime, dividend stocks provide regular cash returns that pay us while we wait for prices to move higher.

Top Twenty Holdings

As of the end of the first quarter, our twenty largest holdings were as follows:

ABBV	AbbVie Inc.	ITW	Illinois Tool Works Inc
AMGN	Amgeninc	LCN	Lincoln National
CAT	Caterpillar Inc	LOW	Lowes Companies Inc
CSCO	Cisco Systems Inc	MSFT	Microsoft Corporation
CMCSA	Comcast Corporation	QCOM	Qualcomm Inc.
DLR	Digital Realty Trust Inc	XLK	SPDR Technology Sector ETF
EPD	Enterprise Products Partners LP	SWK	Stanley Black & Decker
ESS	Essex Property Trust	TFC	Truist Financial Corp
FAST	Fastenal Company	TGT	Target Corp
G	Genpact Limited	USB	US Bancorp

Over the past three months two stocks were added to our twenty largest holdings, forcing two existing stocks off the list. The stocks added, new additions both, were Genpact Ltd. and Lincoln National while the companies dropping in relative importance were Archer Daniels, a major agricultural commodities business and Ameriprise Financial, a large financial advisory company.

Archer Daniels came under examination by the SEC as a result of accounting irregularities found in their Nutrients business. The company’s CFO was immediately placed on administrative leave but it now appears that any adjustments will be smaller than originally thought. Nonetheless, the stock moved sharply lower reducing its value so that it is no longer one of our Top Twenty stocks. We do not believe that this will have a major impact on the long-term health of the business so we are holding for the time being. We are particularly impressed that, in spite of the inherent cyclicality of the agricultural commodities business, it has increased its’ dividend payment every year for over fifty years running. We fully expect that dividend increases will continue to be made annually. And the market seems to agree with the above as at this writing the stock has rebounded by 18% over the past month.

We have no fundamental issues with Ameriprise but it has been such a successful holding that it has become oversized in many accounts resulting in sales purely to reduce excessive exposure.

Genpact was originally a consulting business that was set up by GE to improve the operating performance of its Indian subsidiaries. It is now a public company incorporated in Bermuda though a large portion of its business remains with GE and in India while it continues to diversify its client base. Recent client additions include Microsoft’s Azure platform and Amazon’s web services business. The long-term record of the company is impressive and highly consistent. While its traditional business has continued to grow, it has also begun to offer IT solutions related to the application of artificial intelligence. The company generates substantial cash beyond what it needs for its business so we also expect substantial stock buybacks and continued dividend growth to occur. Selling at about ten times earnings, the company seems substantially undervalued by our measures.

Lincoln National is a holding company that operates multiple insurance and retirement companies through subsidiaries under the general name of Lincoln Financial Group. At the end of 2022, the company took very large charge offs against earnings to boost life insurance reserves and write-off deferred acquisition costs. The result was a large loss in reported earnings for 2022 with a commensurate drop in the price of the stock. But the entire loss of 2022 was recovered last year and the company now looks set for further substantial increases in 2024 and 2025. While insurance companies don’t usually command high valuations, the current valuation of about five times this year’s expected earnings just seems too cheap in a market selling at 20 times earnings. Between an expected revaluation to 8-9 times earnings and a 6% secure dividend yield, the total return potential over the next 3-5 years looks substantial.

What Comes Next

Through much of last year Wall Street was convinced we would see six rate cuts in 2024 as the economy’s soft landing would begin to take hold and inflation would come down. A little less optimistic now, the talking heads and investment analysts have cut that number in half with three rate cuts anticipated. However, there are still many signs that inflation is not yet under control, as it remains a bit sticky above the stated 2% target. We all still generally feel it at the grocery store and when filling up our gas tanks or going out for a bite to eat. Meanwhile, recent manufacturing and jobs data came in stronger than expected, and the unemployment rate remains well below its historic average, indications that maybe the economy isn’t slowing down quite enough for a “soft landing” though it is always hard to be sure until after the fact.

This puts us in an interesting stock market pattern in which stocks often celebrate economic bad news and fall on economic good news, as bad news indicates a higher likelihood of lower interest rates to come ina few months. Rates seem to have an incredible hold over the market right now.

We are skeptical that the Federal Reserve will be able to cut rates in June as anticipated, and we would not be surprised if Jerome Powell pushes that date back or reduces the number of cuts we will see in 2024.His big risk could be an economy that begins to re-accelerate. Not exactly the opposite of a soft landing, this would be the no landing scenario. While most investors hope the Fed can lower rates this year, it might be worse if we see lower rates fanning the flames of an accelerating economy and the Fed had to turn around and increase rates again later on.

Current interest rates are great for savers as they can now actually earn a positive return after taking a haircut for inflation. Two years ago, the rate on any cash or near cash savings vehicle such as a CD or money market was one-half of one percent at best. Now it is not too hard to find rates of 5% or higher on very safe investments. This is a win for anyone who wants or needs to hold onto cash for any reason, and most of us need to hold on to at least some cash. In taxable accounts we generally like to have at least two years of expected withdrawals on hand. However, on the other hand, lower rates make it easier for businesses to borrow funds while remaining profitable. The threshold for making new investments is lowered as rates come down, and mortgages become a bit more affordable. Additionally, lower rates filter through to how we discount companies’ future earnings, which helps boost the value we’re willing to pay for them (i.e. higher stock prices).

We expect that the interest rate debate will take at least several more months and probably longer to shake out, and we remain cautious about what the Fed is likely to do in the coming months. While we wait to see what is going to happen, we are managing cash and fixed income much more closely to take advantage of the higher rates that are now available.

Mr. Market seems to care a lot about the daily news and latest economic reports, while we do our best as investors to ignore the daily noise. We remain focused on holding companies for the long-term that are in strong financial shape, that pay us while we wait through generous dividends, and that can continue to grow over the long term even if the economy should falter somewhere along the way (as it will, eventually).

For the time being, the economy seems quite strong with job growth continuing and corporate earnings often coming in above expectations. And, as noted in the next paragraph, while the deficit continues to accumulate due to the acceleration in government spending since Covid began, it is difficult for us to see a further substantial reduction in inflation.

We do not believe that the answer to the deficit is higher taxes. Last year, Federal revenues grew at about 7%, a very good rate. Without getting into what programs are at fault, spending beyond our means is the problem.

Today as we write this letter, there was further reinforcement on our view that inflation will be stickier than many hoped for. Year over year through the end of March, it was reported through the CPI (Consumer Price Index) that prices are up about 3.5% versus a year ago. While not terrible news, it does reinforce that the job in fighting inflation is not yet over and consumers will continue to feel the pinch in their pocketbooks.

Jamie Dimon, the CEO of JP Morgan Chase, a couple of days ago suggested in the firm’s annual letter to
shareholders this same point. In his view, the main culprit is the ongoing Federal deficit spending which
was just reported for the first quarter alone at over $1 trillion. As long as this huge Federal economic
stimulus remains in place, whether it is critical spending or not, it will be very difficult to see inflation
move much lower. In fact, Dimon suggested that we could eventually see inflation rise much higher than
it is today.

So, while the economy is strong today, we need to watch developments very closely. In response to today’s inflation news, the Dow Jones Industrials are down today about 500 Points or 1.2%. The shortterm noise level is very high.

Yet, we continue to like the companies we own. Over the past several years, buying stocks with very high valuation risk paid off handsomely through high stock returns. Going forward, this is much less likely to be so. But our reasonable growth and income yield choices typically perform best in just this environment.

ELS/DML/SS/LRO