Rule Number 1
3rd Quarter 2025 Commentary • Kori Allen, CFP®
“Rule number 1: Never lose money. Rule number 2: Never forget rule number 1.”
—Warren Buffett
It’s a funny witticism of Warren Buffett’s when you consider that no one has a crystal ball and it seems to conflict with another investment understanding: “the greater the risk, the greater potential reward.”
So what do long-term investors do with conflicting information? We “stick to our knitting”—we focus on what we can control: a disciplined, time-tested approach to portfolio construction. We invest according to what is called “Modern Portfolio Theory” or MPT. The goal is to construct a portfolio with an expected, or target, return with the least amount of assumed risk needed to attain that target. This means a diversified portfolio.
Stating the obvious, 2025 is proving to be an unusual year and there is little indication that this will change any time soon. Here in the United States, norms are being challenged at an unprecedented volume and velocity. Additionally, formerly reliable information sources demand additional scrutiny to determine bias and veracity.
We remain committed to our discipline in selecting securities for our clients. For stocks, we are focused on the company, not the share price, headlines or political turmoil. When investment professionals say, “we are benchmarked to a particular index,” as we are to the All Country World Index (ACWI), they are saying they use that index as a framework for the portfolio makeup. The ACWI represents about 2,500 stocks spanning 85% of global investable assets. Holdings are large and medium-sized companies in developed and emerging economies. Of course, we do not want to buy all 2,500 companies on your behalf, nor do we want much exposure in certain economies. We start with this universe and narrow it down to what we believe will create a portfolio that will give the best risk/reward result.
Another element of our screening is that we focus on quality companies. Certainly, there is some subjectivity here, but there are particular financial metrics that define quality. We like to see a sound balance sheet, a sound return on investment, strong predictable cash flow and consistent long-term growth of earnings among others. By “return on investment,” we don’t mean short-term stock price appreciation, but rather the company’s ability to grow its intrinsic value over time. In his 1987 letter to Berkshire Hathaway shareholders, Warren Buffett channeled his mentor Ben Graham’s wisdom: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” We agree.
Most of the financial news we consume is about the US markets; the Dow or the S&P 500. Since we at Pearl Wealth invest with the ACWI benchmark of 2,500+ stocks, it’s easy to understand that our portfolios won’t follow the performance or “behavior” of the Dow, with 30 stocks, or the S&P 500, with 500 stocks. Our portfolios will differ in terms of geography, size of positions, and underlying economies and their respective currencies and politics. Most of the excitement and gains in the US stock market has been attributed to artificial intelligence (AI) and adjacent companies. In the S&P 500, the top 10 companies now comprise 40% of that index. In the ACWI, those top 10 account for only 24% of the index. (Even this 24% is unusual).
AI has the potential of increasing productivity (and company profitability) and more profoundly, our lives. There will be hurdles and obstacles along the way. We can never predict when those or even breakthroughs will occur. This technological advancement is potent. This is also a time that global order may be shifting.
Our unusual year has given us a weakening dollar, tariffs that rival those seen before the Great Depression, abandonment of traditional diplomacy, dismantling or handicapping formerly stable and independent institutions, and challenges to our constitution and rule of law. According to The Economist (October 9, 2025), “The cost of confinement: Donald Trump’s fortress economy is starting to hurt America.” The stock market has soared while there are storm clouds on the horizon. Inflation, related to tariffs, has mostly been absorbed by America’s importing businesses, but that is beginning to change. On July 30th of this year the BBC reported that Ford expects tariffs to cost the company $2 billion this year. In the Economist piece, they estimate that in 2025 net migration could be zero or negative. This also hasn’t been seen since the Depression. Between migration and tariffs, inflation is expected to continue to creep upwards. Our trading partners are beginning to do more business with other countries due to tariffs and erratic policies. The Wall Street Journal reported on October 7th, 2025, “America’s Soybean Farmers Are Panicking Over the Loss of Chinese Buyers,” that farmers are harvesting a bumper crop and their biggest customer has not booked any purchases in months. From January through August of this year, China had purchased 200 million bushels compared to 1 billion in the same period last year. China is increasingly doing business with South America.
While the economy is not the market(s), they are inextricably entwined. If inflation increases, it would customarily cause the Federal Reserve to hold interest rates steady. Higher borrowing costs dampen consumer confidence and spending. As the US shrinks its labor force and becomes more isolated, our overall economy could slow, and US companies’ margins and profitability would follow suit.
In searching for an appropriate quote to echo our commitment to “stick to our knitting”—perhaps fittingly, given all the current AI excitement—Claude (AI) was consulted:
“When you’re going through hell, keep going.” —Winston Churchill
Discipline, diversification, and a long-term perspective remain our compass, regardless of the headlines.
*Any of our regulatory filings are available on-line or upon request.
The views expressed represent the opinions of Pearl Wealth, LLC as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. www.adviserinfo.sec.gov.
Past performance is not a guarantee of future results.