By Arthur G. Swalley, CIMA®, Partner, Chief Investment Officer

Since 1999, Arlington Financial Advisor’s investment principles have been steady and constant. We invest in high-quality, profitable companies, and we entrust client assets to investment managers who do the same. We invest for the long-term compounding of wealth, and we do our best to avoid fads and “hot-dot” investing through diversification and rebalancing. Several of our portfolio holdings span the entirety of our company’s history.

The results of our approach speak for themselves. Our investors’ returns have been consistent. We have avoided permanent losses of capital in the 2000–2002 Internet bubble collapse, the 2008–2009 Great Financial Crisis, the 2015–2016 shale drilling collapse, and the 2022 bond and technology stock bubble collapses.

Enter spring and summer 2025, post-tariff panic. Behavioral economics experts (including Nobel laureate Richard Thaler), who manage two of our small-cap funds, characterize today’s market dynamic as an “acute garbage rally — a dash to trash.” Non-profitable companies such as unproven technology stocks, meme stocks, fledgling quantum computing companies, and bitcoin-sensitive stocks are leading performance. Measurements of market-neutral momentum, a byproduct of following these sector trends, are at their highest level since 2008, just before the Great Financial Crisis.

Soaring worldwide debt from persistent government deficit spending, with its attendant liquidity, is also fueling speculation. Silver is up 70% this year, with gold and bitcoin establishing records, driven by investors seeking safe havens. Risky lending strategies are broadly distributed in illiquid private credit vehicles, which are now being approved for distribution to average investors’ 401(k) retirement plans. Similar waves of investment came to junk bonds in the 1980s and subprime loans in the 2000s. Both waves crashed into a sea of bankruptcies and government bailouts.

In 2025’s post-tariff market environment, our investments in behavioral strategies, rules-based strategies, and quality long-term stocks and managers have underperformed the speculations outlined above. Our disciplined adherence to our time-tested principles of asset allocation, rebalancing, and diversification has underperformed short-term momentum excess as well. We expect this result because we recognize the behavioral traps that have been set up in today’s marketplace.

Currently, six big tech companies (Nvidia, Microsoft, Apple, Amazon, Alphabet, and Meta) make up 35% of the S&P 500. Their valuations are predicated upon sustaining current (very high) profit margins and revenue growth rates. Historically, with outsized growth and margins comes increased competition and/or regulation, and a subsequent regression of valuations to the mean. This is a natural cycle of capitalism and one we believe will apply again.

In 1999, Warren Buffett’s investment vehicle, Berkshire Hathaway, was derided as hopelessly anachronistic for not participating in the Internet bubble and the massive outperformance of the S&P 500. From 2000 through 2024, Berkshire’s cumulative return was 1,237%, versus the S&P’s 446%. As of June 30, Berkshire Hathaway holds $344 billion in cash — 27% of total assets — versus its long-term average of 13%. While Mr. Buffett is retiring at the end of the year and professes not to time the market, we believe his long-held practice of deploying assets only when he can identify high-quality businesses at attractive prices is a strong statement about today’s speculative market environment.

We believe that good investment discipline benefits from careful study of investor behavior. In the 2025 Natixis Global Survey of Individual Investors, conservative (36%) and moderate (47%) investors expect a 10.7% long-term return over inflation. Given that the S&P 500’s long-term return is 10.4% with an average inflation rate of 3%, even a volatile 100% allocation to stocks will not come close to meeting current investor expectations. We think that most investors will revert to the very human behavior of being more fearful of volatility than they are greedy for potential returns.

So, should investors own stocks in this environment? Yes, because even with increased volatility and lower expected returns, long-term business ownership offers better returns than the alternatives in our successful capitalist system. The key is to own businesses at attractive prices. Our portfolios are carefully designed to own more high-quality global businesses at cheaper prices, and fewer at expensive, speculative prices. They are also designed to balance against the forces of short-term price volatility. We are confident that our focus on quality and the long term will continue to deliver the results our investors have come to expect.