I am pleased to report on another strong year working together toward your most valued financial goals. Your financial plan continues to be driven by these goals, rather than by any economic forecast or market prediction. That will continue to be the case throughout the coming year, and beyond.

I like to start each annual letter by restating the core beliefs that guide our planning and investment approach and then offer a few comments about the current economic landscape.

General Principles:

We are long-term, goal-focused, plan-driven investors. Our core investment policy is to pursue your goals through investing in broadly diversified portfolios of quality businesses.
We believe that the economy cannot be consistently forecast, nor the markets consistently timed.
We maintain that the only way to be reasonably confident of capturing the premium return of equities is to remain invested through the frequent, sometimes significant, but historically temporary declines.
We do not hastily react to, much less try to anticipate, economic shifts or market events. While your long-term goals remain unchanged, so will our plan for achieving them.
We believe that the long-term compounding of equity returns is the most important force in the achievement of your goals. We are guided by the late Charlie Munger's dictum, “The first law of compounding is to never interrupt it unnecessarily.”

Current Commentary:

In 2025, the broad equity market completed its third straight year of double-digit returns, driven by a resilient economy and significantly increased corporate earnings. The S&P 500 ended the year up 16.4% (excluding dividends).
Somewhat remarkably, S&P 500 profit margins continued to expand—to 13.1% in the third quarter of 2025, the highest in 15 years (source FactSet). One would have thought that inflation in companies' costs colliding with consumer resistance to price increases would have been a significant headwind. So far, at least, one would have been wrong.
The principal weak spot in the economy has been the employment picture, with a continued softening in the labor market. But even this has its bright side: the combination of strong economic growth and flattish employment have produced steadily rising per capita productivity. Unemployment may have recently ticked up to 4.7%, but the increased productivity of the employed workforce is allowing companies to raise wages without triggering inflation.
After three rate cuts in the backend of 2025, Federal Reserve monetary policy is 75 basis points looser than it was a year ago, even with sticky CPI inflation still pushing three percent. It seems more than reasonable to expect the lagged effects of this easing to begin showing up in 2026.
On top of these economic and fiscal events, the burning question all year long was “Are we in an AI bubble?” This replaced the previous year's burning question “When and by how much will the Fed cut rates?” Which in turn replaced 2023's “Will there be a recession?”
There was never a recession, and the Fed did cut rates, but that's beside the point. The point is that the universal burning question is usually the wrong question, and a distraction to the well diversified long-term investor—like us.
There can be no question that the broad equity market is more heavily concentrated in a few huge tech stocks—which can't all win the AI race—than it has ever been in our investing lifetimes, and that this concentration has the Index selling at a price/earnings multiple near its historic peak.
Our response to this is twofold: (a) Valuation is not an effective tool for short-term market timing, and (b) Windward uses portfolio rebalancing to keep your investment mix in line with your Investment Policy Statement when asset classes get significantly above or below their target allocation.
All of this suggests that the next significant market shock, and there will always be a next one, will probably come out of deep left field (in the jargon, an unknown unknown, as opposed to a known unknown like valuation or the national debt).
Our recommendations for 2026 are generally unchanged from the past few annual letters and remain what they have always been. We will continue to stay the course through these noisy times. We look forward to reviewing your long-term goals with you to determine if your current plan is still the best path forward to achieve those goals.

We wish all our friends and clients—because to us they're the same thing—a healthy, happy and prosperous 2026. We're always here to address your questions and concerns. Thank you for being our clients. It is a privilege to serve you.

Sincerely,

Drew Osborne
CEO, CIO, Senior Wealth Manager
Windward Private Wealth Management

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