Lawrence J. Waldman will join First Long Island Investors, LLC, a wealth management company established in 1983, as a Managing Director on May 2, 2016. At FLII, Larry will focus his time on being part of the team which advises current and prospective high net worth individuals, families, and select institutions on the benefits and value of FLII’s investment and wealth management services. He will also play a key role in creating as well as furthering strategic relationships with professional services firms on Long Island. FLII, which was founded in 1983, oversees in excess of $1.3 billion dollars in assets.

“I have been associated with FLII for many years and am delighted to join it in a full time capacity. I hope to use my breadth of experiences to help FLII grow its client base and advise its investment committee utilizing my extensive financial background” said Mr. Waldman. “This is a natural progression for me that builds upon my career in public accounting, serving public and private companies across various industries as well as my relationships with and knowledge of the Long Island business community. I look forward to this challenge and hope to contribute to the growth of FLII in the New York metropolitan area.”

Until 2006, Larry was the Managing Partner of the Long Island office of KPMG, the international accounting firm, where he began his career in 1972 and was responsible for the direction and operating of its Long Island practice. Larry currently serves as an advisor to the accounting firm EisnerAmper LLP, and as a board member and audit committee chairman for several public and private companies.

Robert D. Rosenthal, FLII’s Chairman, CEO and Chief Investment Officer, said: “Throughout his distinguished career, Larry has continuously worked with and been a trusted colleague of the firm and our clients. We are proud to add such a prominent and well-respected member of the Long Island business community to our team.”
Larry is an active leader in the Long Island business community, currently serving as Chairman of the Board of the Long Island Association, which is the region’s leading business organization. Kevin Law, President and CEO of the Long Island Association said “We are fortunate to have Larry as our Chairman and congratulate him on his new role at First Long Island Investors. He is a respected business leader who has served on the LIA Board for more than two decades and helps support our efforts to grow Long Island’s economy, create jobs, and improve the business climate for our region.”

Additionally, Governor Andrew Cuomo appointed Larry to serve as Chairman of the Long Island Power Authority in the wake of Hurricane Sandy, a position he held for more than a year following the devastating storm where he oversaw what was at the time the second largest public power utility in the nation. He currently serves on the Board of Trustees for the State University of New York and serves as Treasurer and Board Member of the Long Island Angel Network. He also serves on the Board of Directors and as the Treasurer of the Advanced Energy Research and Technology Center at Stony Brook University. Larry also serves on the Dean’s Advisory Council of the Zarb School of Business at Hofstra University, where he is an adjunct professor in the graduate program.

INVESTMENT PERSPECTIVE

“Traders can cause short-term volatility. In the long run, markets must revert to a sensible price/earnings multiple.”
Ben Stein (noted economist)

The confluence of instant communications, high-frequency trading, algorithmic trading, and various index and exchange traded funds have all led to the potential for greater volatility. These factors coupled with the following economic and investment questions/issues posed by some investment pundits created a very volatile first quarter:

1. Was the United States already in a recession?
2. Would corporate earnings decline?
3. Would the plummeting price of oil lead to some sort of financial crisis?
4. Would the slowdown in China lead to economic strife in developed (except the U.S.) and emerging countries?
5. Would interest rate increases by the Federal Reserve roil equity and real estate markets?

The result was a tumultuous start to this first quarter with equity markets declining by 10% through the middle of February. It was the worst January for common stocks in the history of the S&P 500. This required our steady hand in providing guidance to our clients that this market downturn was overdone and not justified by fundamentals.

Although we hesitate to ever look at one quarter as being meaningful in a long-term investment plan, we offer the following chart to depict just how volatile the first quarter was on both the downside and upside:

Given this concentrated volatility (we have been forecasting volatility for the past year), we had to reexamine our view of the economic and investing world to ensure it was still intact. We wanted to confirm that something did not happen to the economy that we somehow missed. We checked the employment gains of the last twelve months to make sure they were still intact, and they were (2.45 million new jobs in 2015). We reviewed inflation to make sure that it was still benign and trending a bit below 2% (it was 0.7% for 2015). We had conversations with economic consultants and investment colleagues to make sure that China was still in business and that its economy was still growing, albeit at a slower rate than recently. It is, and in our opinion it seems to be headed for between 4% and 6% annual growth. We debated the issue of much cheaper oil. Were there benefits to the global consumer? Yes. Would this outweigh, in our opinion, the damage to oil producing and related companies as well as to those countries that are net exporters of energy? Also, would some banks be severely compromised by their exposure to borrowers hurt by cheaper oil? On balance, we concluded that cheaper oil was a net positive (and still believe that). We also debated how many rate increases would be implemented by the Fed, ranging from none to four in 2016, and the impact of each scenario on the different asset classes we mainly invest in: stocks, bonds, hedge funds, and real estate. In our opinion, added volatility would occur especially if there were more than one or two, but valuations would not be changed dramatically.

We came to the conclusion, as we faced declining equity markets, investor fear, and volatility, that not a lot had changed from the end of last year. Valuations for stocks were far from cheap but not terribly expensive (about 16 to 17 times projected S&P 500 earnings for 2016). Possible increases in interest rates by the Federal Reserve would be modest and not harmful to the economy, in our opinion. If anything, these rate increases would reflect a better economy characterized by employment growth and modest wage increases. China is in fact slowing but would still provide economic growth to the global economy (and is transitioning from manufacturing/infrastructure to more consumer/services-based growth). Declining oil prices would benefit global consumers, although declining prices would hurt oil producing companies and countries as it did last year. We reviewed oil demand and it is actually growing. Thus, the problem causing cheap oil prices was supply growing faster than demand, which created surplus inventories, and not one of falling demand. It would be more serious if it was a problem of falling demand which could indicate a global recession. We provide the following chart to show that demand for oil is still increasing:

Finally, we believe that the U.S. is not in recession, just growing slower than the average economic expansion and slower than we need to grow. Slow growth is not good for earnings growth for the average company. We believe that our politicians in Washington have let us down by not providing much needed fiscal policy to promote better economic growth. Accommodative monetary policy, that is easy money, must be complemented by fiscal policy of pro-growth initiatives to foster efficient economic growth, which increases employment and capital investment. Business investment is much less than desirable so far, and that is why we have anemic economic growth without the type of corporate capital investment that bodes well for the long term. This leaves corporate America with too much cash and not enough economy-building investments.

What the first quarter demonstrated is that fundamentals can be overlooked in the short term. The quote from Ben Stein implies that investors should look to what any asset’s reasonable valuation is. So, when we go through periods of concentrated volatility, we check the fundamentals and valuations. We did just that and came away with the conclusion that economic and investment conditions did not warrant the sharp selloff of the first month and a half. Accordingly, we stayed the course and our clients did as well. We believe they will be pleasantly surprised when they receive their first quarter asset allocation statements.

Looking Ahead:

We survived the first quarter’s volatility with either very small losses or modest gains in our investment strategies. However, economic conditions are still handcuffed by slow growth or no growth economies. Central banks around the world continue to be accommodative (evidenced by negative interest rates in Germany and Japan) with the U.S. tilting towards some modest tightening, but in a slow and measured way in our opinion. Corporate earnings and revenue growth is challenged and will be modest at best this year. Even this will require some help from the weakening U.S. dollar for U.S. domiciled multi-national companies which will reverse the strong dollar head winds of the past few years that compromised earnings growth for many companies. Oil prices have rebounded from the lows seen early in the first quarter, and perhaps a bottom is approaching. It will take some time for the recent production cut-backs to bring demand and supply into a position where pricing will increase more significantly. As an example, the rig count in the U.S. is down by more than 50% from last year evidencing the cut-back in drilling activities.

On another front, the political situation in the U.S. will likely cause some uncertainty and volatility throughout 2016. The inability of politicians in Washington to agree on fiscal growth initiatives via tax reform and infrastructure spending has hampered domestic economic growth. This and other factors have led to widespread frustration among both individuals and business and is adding to the anger we read about on a daily basis. This lack of pro-growth fiscal policy is the major link missing in what could foster a faster growing domestic economy. My contacts in Washington suggest it is being worked on. I have heard this before, and given the stage of the election cycle, one can assume that such reform will not take place this year. This environment has both individuals and businesses acting defensively, leaving excess cash on the sidelines.

Given all of the above, we expect continued volatility, modest domestic economic growth (therefore no recession in 2016), disappointing global growth, investor hesitation pending moves by the Federal Reserve, and anxiety over the coming election in November. Add to this, the seemingly weekly terror attacks around the world that chill investment and spending appetites.

In this economic and investment environment, we remain positioned with an overweight to our defensive strategies. In our opinion, they provide the best opportunity to achieve a reasonable return over the longer term, while being defensively positioned to weather what we expect to be continued volatility and disappointing economic growth. One strategy provides a growing cash stream of dividends while another provides hedged access to a concentrated portfolio of what we believe to be reasonably valued growth companies that will be successful in achieving above-average earnings growth in this environment. We continue to underweight our international exposure in our traditional equity basket. We simply do not see compelling valuations yet overseas given the murky growth picture, despite the incredibly accommodating central banks.

Cash and fixed income at the current levels of return are not attractive to the long-term investor whose goal is to grow one’s net worth several percent above the modest current inflation rate of roughly 1%. Thus, we are not adding exposure and remain underweight to fixed income. Cash has never been a good long-term asset allocation, and one should only hold cash necessary for spending, taxes, other obligations, and to sleep at night.

Finally, we maintain our recommendation that for suitable investors, an appropriate portion of assets should be allocated to private equity and/or real estate investments where there is a greater potential for returns than our traditional equity investments. These investments typically carry a higher degree of risk as well as a longer period of illiquidity. During the first quarter we made available to suitable clients a private equity opportunity through an investment in a very interesting four-year-old medical products company. Like other investments in our fourth basket of private investments, it is illiquid and has a higher degree of risk. However, we believed the opportunity was worth pursuing and it added to asset diversification for those clients both suitable and interested.

Thus, not a lot has changed, as our first goal is to always preserve capital and not have clients whipsawed emotionally causing potential poor investment decisions. As we have always clearly stated, a well thought out asset allocation with a view to the long term should insulate most clients, if not all, from making emotionally driven short term investment decisions that will rob one of long-term compounding returns.

We have a few pieces of news to share this quarter. First, we are excited to share that Lawrence J. Waldman will be joining the firm as a Managing Director on May 2, 2016. Larry has a long history in public accounting and has been a friend of the firm for quite some time. He will be part of the team which advises current and prospective clients on the benefits and value of FLII’s investment and wealth management services. He will also play a key role in creating as well as furthering strategic relationships with professional services firms on Long Island. Additionally, his financial background will be a helpful contribution to our investment committee. Virginia Umbreit, Vice President – Portfolio Administration and a Member of the Investment Committee, has been appointed to the Board of Directors of the United Way of Long Island. We hope that you will join us in congratulating Virginia.

We look forward to reporting to you after the end of the second quarter. In the meantime, please do not hesitate to call or visit with any member of our investment team to discuss our investment views as well as your individual investment allocations and wealth management needs.

Best regards,

Robert D. Rosenthal
Chairman, Chief Executive Officer,
and Chief Investment Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results. Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending March 31, 2016, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2016 by First Long Island Investors, LLC. All rights reserved.

Robert D. Rosenthal, Philip W. Malakoff, and Brian Gamble discuss the factors causing market volatility and provide perspective on our approach to long-term investing in 2016 and beyond in an hour-long web seminar.

This critique of the Fourth Quarter will be brief as by now you hopefully have read our annual thought piece: “Welcome Back Volatility.” It describes how volatility became more pronounced in both the third and fourth quarters of 2015. The contributors to that volatility were investor uncertainty as to when the Federal Reserve would finally raise interest rates (they finally did in December), the continued plummeting of commodities led by oil, geopolitical tension around the world including terrorist attacks in Paris and San Bernardino, California, and the slowing of the Chinese economy as well as the devaluation of its currency.

These factors and the ensuing volatility masked what turned out to be a very positive quarter for equity markets which bounced back from the correction in the third quarter. (Our first correction since 2011!) However, the fourth quarter rally was not broad based and did not lift all ships. In fact, a number of large-cap growth companies, including Facebook, Amazon.com, and Alphabet (formerly Google), along with some others, helped the S&P 500 achieve a solid gain in the fourth quarter and were very much responsible for that average eking out a slight gain for the year. However, the reality is that many stocks declined in price as the result of a slowdown in growth of the global economy, collapsing oil prices, and the appreciation of the U.S. dollar.

Fortunately, all of our equity based strategies delivered solid performance or better in the fourth quarter. As mentioned before, our asset allocation advice to our clients to participate in growth-oriented strategies led to reasonable gains for the quarter and full year in our hedged growth strategy (nine consecutive years of outpacing its index); our Core strategy (which beat the S&P 500) and our growth-oriented equity strategy which also beat its weighted benchmark (includes both domestic and international components). Our Dividend Growth strategy delivered on its goal of providing clients with a strong increase in its annual dividends. The strategy’s average dividend increased by 9.5% and it also outpaced one of its indices, the Russell 1000 Value Index.

In other areas of investing, we are very pleased with the real estate mezzanine debt investment we launched in the third quarter as it appears to be making progress. Two of our value-oriented investments are very much tied to the success of Sears Holdings and Seritage Growth Properties (the R.E.I.T. created with some of the properties previously owned, or in a few cases ground-leased, by Sears and now leased back to it). Although progress was achieved from a corporate standpoint, Sears’ stock remains a disappointment, however we continue to believe in Edward Lampert, Chairman and CEO of Sears Holdings; Bruce Berkowitz, President of Fairholme, our deep value manager with a large position in Sears and Seritage; and the significant underlying value of the real estate in both entities.

In summary, we believe that we achieved reasonable results in a difficult environment for investing. Several of our strategies did well from both an absolute and relative standpoint. After many years of market appreciation and 0% interest rates, both a correction and an increase in interest rates were inevitable. We believe these will be digested by the investment markets, but with greater volatility, which we will just have to live with.

Careful asset allocation and concentration in companies with good earnings and revenue growth along with those companies that continue to grow dividends should help us achieve decent results in what we expect will be a most volatile 2016. In addition, investing in some strategies that have less correlation to equity markets should also provide some help in delivering a positive year facing the typical “wall of worry” that we as investors are used to.

We are pleased to share that Teri Vobis, has been promoted to Assistant Vice President and Director of Taxation. Teri is an integral part of our finance team and is available if you have any tax related questions. Please call upon any of us at FLI for help with your wealth management needs.

Best regards and wishing you a healthy and Happy New Year,

Robert D. Rosenthal
Chairman, CEO, CIO

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results. Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending January 29, 2016, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2016 by First Long Island Investors, LLC. All rights reserved.

“Anything is possible, and the unexpected is inevitable. Proceed accordingly.”
Jason Zweig (noted investment authority)

2015 proved to be a challenging year for many traditional and hedge fund investors. Most indices were down or only slightly positive (Dow 0.2%; S&P 500 1.4%; Russell 1000 Value -3.8%; Barclays Aggregate Bond Index 0.6%; MSCI EAFE -0.8%; High Yield Index -4.0%; the Alerian MLP -32.6% and the HFRX Equity Hedge Fund Index -2.3%). The one bright spot was a small group of large-cap growth companies that helped the Russell 1000 Growth Index and the NASDAQ Composite appreciate by 5.7% and 7.0%, respectively. This helped three of our strategies post solid gains in this challenging environment. Strong earnings and revenue growth from these larger companies paid off. More about that later. Meanwhile, concerns about when the Fed’s liftoff might occur, after seven years of “0%” interest rates (who would ever have thought that!), were finally answered in December. The uncertainty as to when the Fed would finally raise rates was a cloud over investors throughout 2015, contributing to stock price volatility. Also, the unexpected plummeting of oil prices by 30% in 2015 (almost 65% from its recent high!) also added to volatility and worries about global growth. The reduction in oil prices should be the ultimate tax decrease for consumers and many businesses. This contributed to a very positive December consumer sentiment indices both in the U.S. and Germany.

Meanwhile geopolitical concerns, including a mounting threat from ISIS, continue to be a concern, exemplified by recent senseless civilian deaths in both Paris, France and San Bernardino, California. The civilized way of life is being threatened by both Iran, with its nuclear ambitions, and the brutality of the Islamic terrorist caliphate growing in Iraq, Syria, and Libya. The response to this from the United States and its allies has been somewhat disheartening. The Obama administration has talked a strong game, but its desire to not commit ground troops, and to use a constrained air attack, has not sufficiently worked thus far in our opinion. In addition, inconsistent support from moderate Arab nations has also been disappointing. This has opened the door to Russia playing a more meaningful role in Syria, both bombing ISIS while at the same time supporting the brutal Syrian dictator Asad by attacking rebel forces. Our government’s underestimation of this threat, while signing what we believe to be a weak nuclear agreement with Iran, leaves a very troubling situation in the Middle East. This in turn creates the potential for more volatility and investor hesitancy to take on risk.

Our slow, but sustainable, growing domestic economy is reflected in stronger employment and modest GDP growth. Unemployment has dropped to 5% and wage growth has started to gain some traction, however the strengthening dollar over the past year has reduced the earnings of many of our U.S. domiciled multinational companies. Additionally, a weakening and transitioning (from infrastructure to consumer driven) economy in China and generally slow global growth are concerns for investors. These factors contributed to a sizable increase in volatility in both the third and fourth quarters of 2015. The following chart demonstrates this, and confirms our suggestions of forthcoming higher volatility made in both our third quarter report and mid-year web seminar:

This increased activity of one percent or more daily moves in the equity markets has been disconcerting to most investors. We expect more of the same in 2016 as the factors creating this volatility remain in the forefront. Although the Fed has suggested its interest rate increases will be moderate and gradual, there is still uncertainty and increases will be data dependent. Thus, the anticipated gradual increase in interest rates by the Fed makes us very cautious on fixed-income investing as increasing interest rates could result in meager bond returns, or possibly even losses. The threat of higher interest rates, distress within energy companies, and the failure of one high-yield mutual fund to deliver on daily liquidity led to exaggerated losses, which we believe may not have been necessarily based on fundamentals, in high-yield bonds, which overall had a very poor 2015. Thus, we believe this could represent an opportunity if one steers clear of most of the energy sector. (We are currently exploring an investment in this area and conducting thorough due diligence before presenting it to suitable clients.) Furthermore, virtually the entire panoply of commodities has plummeted. Copper, gold, oil, natural gas, and other commodities have suffered double-digit declines. Fortunately we at FLI have never been fans of investing in commodities, and avoided virtually all of this carnage. Many other wealth managers, as well as certain consultants, call for a modest allocation to commodities. We generally avoid the space.

Another potential catalyst for volatility will most likely be the Presidential election this November. With the ending of President Obama’s final term, the Presidential race appears to be one of very different opinions on taxes and social issues, as well as how to defeat ISIS and combat terror. At this point, at least on the Republican side, nothing seems clear. The eight remaining candidates seem to be in different camps ideologically: the very conservative, the more moderate, and the non-politicians. At the same time, while the House seems safe for the Republicans, the control of the Senate will be fiercely contested. Too much money will be spent on these elections. Perhaps one day there will be real election finance reform. The money could be better spent elsewhere, such as philanthropy. Of note, year-end compromises did lead to legislation funding the government, as well as certain tax breaks and social benefits without the typical acrimony. Perhaps things are changing for the better.

There is going to be volatility. That does not mean we cannot make money. We believe that a prudent and defensive asset allocation, one utilizing investment strategies with high active share and concentration in the best ideas, can result in decent investment gains. The following chart shows that in the past, periods of higher interest rates supported appreciating equity markets (and real estate is still taking advantage of low rates and a growing domestic economy).

The chart demonstrates that when interest rates rise because of a stronger economy, equity markets can appreciate. It should also be pointed out that historically a recession does not occur until about five years after the first interest rate increase. This certainly is cause for guarded optimism for equities and real estate in our opinion.

Before getting to what we believe is a prudent asset allocation for 2016, we must take a look at market valuations. This past year we suggested that valuations for U.S. equities were reasonable, but not cheap. (We are still underweight international companies based on valuation.) Despite this, investors pulled billions of dollars out of domestic equity markets, especially during the third quarter correction. As we shared in our third quarter report and maintain today, we believe that domestic equity markets are reasonably priced and provide select opportunities. Corporate earnings in 2015 for the S&P 500 are expected to be ever so slightly down. This pause in earnings growth can be attributed to a large degree to the strengthening dollar and to a lesser degree both a slowing global economy and declining oil prices. U.S. domiciled multinational companies whose operations may have prospered in local currencies were penalized when those foreign earnings were translated back to the U.S. dollar. The plummeting price of oil severely impacted energy companies, which make up approximately 6.5% of the S&P 500 (down from 8.4% as of 12/31/14) and lost 24% in 2015. The price of oil has now dropped about 65% over the last eighteen months.

Oil has just about reached the same low point as at the depth of the 2008 financial crisis which I coined, the “Decession.” There is a bit more supply, but it seems as if things are just not that bad enough globally to warrant such a drop. Perhaps oil and oil-related companies might not be the same drag on S&P earnings in 2016. We believe that many companies continue to grow earnings and in general are trading at a reasonable P/E of approximately 16 on 2016 projected consensus earnings, which to us is fairly valued. The following chart supports our contention that this level of price earnings multiple is similar to other periods of time where low rates of inflation supported multiples in our projected range:

And, by the way, there are some glimmers of hope that the Eurozone economy will resume growing. Perhaps it will contribute to global earnings growth this year. We believe smart stock pickers can find opportunity in this investment landscape. Some companies will grow well above average and some provide solid values. Our job, and the job of our outside managers, is to find them. As indicated earlier, some large growth companies did well last year. We owned some of them across several of our strategies.

2016: What to expect and what to do

Let us start with what we expect. Interest rates will increase slowly this year. Bonds will provide little if any return and in some cases a negative return (high-yield could be the exception). Cash will continue to provide virtually no return. S&P 500 earnings will grow modestly, especially with the appreciating dollar being less of a factor (historical analysis actually shows the dollar declines in value after interest rates start to rise). Housing will remain robust and contribute to an expanding domestic economy. Oil will bottom out in our opinion at something close to current levels as we suggested earlier. Inflation will remain reasonable at about 2%. Congress will attempt to tackle tax reform with a view towards making our corporate tax rates more competitive globally. The fight against Islamic terror will intensify through a U.S. and moderate Arab-led coalition. Unfortunately there will be other terror attacks. A new President will be elected. The Chinese economy will continue to slow as it transitions from an infrastructure/industrial based economy to one that is more consumer/consumption driven. But nevertheless, the second largest economy growing between 4% and 5% per annum, is still constructive. Other emerging markets that are commodity-driven face recession. And yes, there will be more volatility!

In this type of environment, we will remain tilted to defensive strategies, growth companies, and quality investments. Sounds familiar? We expect to make money by using that bias while still being opportunistic. We will deploy capital to reasonably valued companies in our defensive, traditional and private investment baskets with above-average revenue and earnings growth, companies with strong dividend growth, deep value companies where catalysts exist to trigger appreciation, real estate oriented opportunities with high current yields, and potential private equity opportunities with among best of breed managers if we can gain access. We will underweight fixed income as the yield on high-quality municipal bonds and the after-tax yields on high-quality corporate bonds appear limited and barely above the expected rate inflation. We continue to explore high-yield debt in an opportunistic way seeking to take advantage of market disruptions as is the case now. For the most part, we will continue to avoid companies with direct exposure to commodities.

Many investors still are reluctant to stay the course in equities as evidenced by equity outflows in the third quarter correction and during the fourth quarter. (Fortunately not our clients as equity markets significantly rallied in the fourth quarter!) We believe reducing equity allocations (for properly allocated investors) was and continues to be a mistake. With equity valuations being reasonable and opportunities to own reasonably valued companies with strong earnings and revenue growth, long-term investors can be rewarded. The same can be said for larger companies that continue to raise cash dividends each year. (Companies in our Dividend Growth strategy have raised dividends for 26 consecutive years on average!) Financial companies, after years of significant litigation expense and government hyper-regulation, might just have some wind in their sails from modestly higher interest rates, dissipating litigation from actions that led to the financial crisis, and an improving economy (as long as the yield curve does not flatten too much). In our opinion, investor skepticism based on worries of these moderately higher interest rates is unfounded based on history. Equity markets have typically appreciated after initial rate increases by the Federal Reserve.

Be prepared for continued volatility. Despite this, we remain convinced that through careful and objective research there are ample investment opportunities for quality and defensive-minded long-term investors. We seek to accomplish long-term positive performance through our recommendation of a prudent, individualized asset allocation for each of our clients. A diversified asset allocation was key to most of our clients achieving reasonable relative 2015 performance in a difficult investment environment by having an exposure to large-cap growth companies, which outperformed large-cap value companies by almost 1000 basis points! As an example, the bastion of smart value investing, Berkshire Hathaway, suffered a 12% decline (We still like the company). Certain well known value-oriented hedge funds also suffered double-digit declines. Who would have thought? Again, a diversified and individualized asset allocation remains an important focus as we do not have the benefit of a robust global economy to lift all ships/asset classes. In addition to certain equity asset class sub-categories, real estate, with a proper valuation discipline, also represents opportunity. Finally, we must be prepared for the unexpected such as was the case with interest rates at “0%” for seven years or oil dropping by a whopping 65% over the past eighteen months. Being diversified but concentrated and tilted defensively, in our view, can help protect one from the unexpected, while not giving up the opportunity to prosper over the long term.
One last thought. It was not long ago that certain pundits suggested one could not be rewarded by being a long-term investor in equities. We believe that has been disproven and is nonsense. The key is to identify great businesses that are well managed and innovative with strong finances, vision, and reasonable valuations. We, and our outside managers, have been able identify and make investments in many of these great business over the long-term, benefitting several of our strategies. We believe there are a number of companies that meet this criteria and still represent sound investment opportunities as a significant part of one’s asset allocation. Just ask Warren Buffett, the iconic long-term investor. We will however, just have to endure the volatility and occasional company disappointments that go along with investing. This is nothing new and actually provides opportunity.

We at FLII wish you all a healthy, happy, and prosperous New Year. We are here to help you achieve each of those goals. We will be holding our 2016 Outlook web seminar on February 2, 2016 at 2:00 pm and encourage you to join us. You can register by emailing us at events@fliinvestors.com. Please do not hesitate to call me, Ralph, Phil, Ed, or any other member of our investment team if there is anything we can do to be of assistance.

Best regards,
Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results. Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending January 19, 2016, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such.

References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2016 by First Long Island Investors, LLC. All rights reserved.