So, lets see, today is December 23rd by the time I finish writing about the U.S. economy, the global economy, maybe a little on a few specific countries, on the Fed, on politics, on inflation, on commodities, on bonds, on stocks, on sectors, on and on and on, itll probably be New Years Eveish before Im ready click the send button and deposit the link to this years opus into your email box.
Maybe I should mix it up this time and have it published in hard copy; send it to you as a late Christmas present---maybe youre the nostalgic type who likes the feel of the pages between your fingertips. Maybe your idea of a good time is curling up by the fire with a treatise on the aforementioned topics---one the size of Gone With the Wind... Hmm Nah
Of course I know better. So much so that Ive decided to really make this years compilation palatable---by not compiling it; by delivering it to you in relatively short, concise, hopefully appetizing slices. Beginning here with some basics
I recently picked on the late Albert Einstein; suggesting that he either thought successful investors were utterly insane, or that he was oblivious to the fact that sticking to ones discipline---essentially doing the same things over and over again and expecting that results will differ in the short-run---is the essential element to long-term investment success.
I addressed the fact that the past two years have been a virtual standstill for the portfolios of globally diversified investors. I suggested that, if asked to, Id be happy to produce a few charts illustrating similar periods of the past. Well, nobody asked, which means you are all either very patient, very comfortable with the work we do (talking to our clients of course), didnt even read the commentary in question, or any combination of the three.
I, alas, really wanted to say that I produced the following charts upon request. Oh well
We'll begin by taking a look at the New York Stock Exchange Composite Index from 12/31/2013 to the present:
click to enlarge
Yep, nothing! Well, okay, a lot if you look at all the ups and downs---but nothing in terms of growth over the past two years.
Per my December 20th commentary, too many individual investors left to their own devices would be throwing in the towel right about now, if they hadnt already. Heres that short essay in its entirety:
In yesterdays commentary I touched on Einsteins insight into an aspect of human nature that can kill ones odds of achieving long-term investment success:
Human beings must have action; and they will make it if they cannot find it.
In last Mondays Wall Street Journal, Wesley Grey made the point beautifully. Heres a snippet (HT Jeff Miller):
Imagine the following theoretical investment opportunity: Investors can invest in a fund that will beat the market by 5% a year over the next 10 years. Of course, there is the catch: The path to outperformance will involve a five-year stretch of poor relative performance. No problem, you might thinkbuy and hold and ignore the short-term noise.
Easier said than done.
Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.s highest performer of the decade ending in 2009. The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didnt end there: The average investor in the fund lost 11% annually over the period.
What happened? The massive divergence in the funds performance and what the typical fund investor actually earned can be explained by the behavioral return gap.
The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a funds sound long-term process, the dollar-weighted returns, or returns actually achieved by investors in the fund, lag substantially.
In other words, fund managers can deliver a great long-term strategy, but investors can still lose.
Yep, those stretches of poor/flat performance can drive a person insane!
So heres a look at what waiting out those flat periods of the 80s wouldve delivered to investors who---unlike those who traded the CGM Focus fund during the 00s---had stayed with their discipline:
click to enlarge
Heres the 90s:
So, now youre thinking that periodic dead zones are always followed by stretches of great results. Well, look what happened after the flat periods that occurred from 1999 to 2001:
Can you imagine? Waiting patiently, maybe having studied the 80s and 90s, and then experiencing the bursting of the 90s tech bubble!
Well, thats what we did, while convincing clients who were still working to not only continue funding their retirement programs, but to take full advantage of that bear market by increasing their contributions if they could. And while rebalancing (buying on the way down) the portfolios of retired clients who had enough fixed income exposure to continue their retirement distributions without having to sell stocks during a down market.
Then the ensuing rebound:
Which included a flat stretch, that was followed by a bear market for the ages:
Repeat the above "Can you imagine?" paragraph here; replacing "tech bubble" with "real estate/mortgage bubble".
Then the ensuing rebound (taking us to 2015):
Which included a few flat stretches:
And, again, here we sit today:
In case you're wondering, the NYSE Composite Index was at 585 when our story began. It sits at 10,258 today.
So, going forward, what should we expect from the market? I wish I knew. I can make a compelling case for either direction (in the near-term) from here.
As Ill illustrate in another section soon, U.S. stock valuations, in the aggregate, are not presently compelling (which is cause for concern). However, the near-term odds of recession are slim and sentiment kinda stinks (which, believe it [the latter] or not, are two reasons to relax).
I personally find great comfort in the simple fact that the success of our typical clients long-term portfolio is tied to the fortunes of literally hundreds of the worlds very best companies. The vast majority of which will be profitably selling their wares to a world of desiring consumers for eons to come, while paying dividends to their shareholders (and/or buying back shares and/or buying other companies) regardless of what their stock prices do along the way.
Heres a snippet from a recent essay where I drove that point home:
Tell me youre not at least a little nerve-wracked over the stock market these days. Im not hearing anything because you cant tell me that. As much as we know that equity investing is a long-term affairand that volatility is inevitablelets face it, when its bad it stinks!
When the stock markets bad we wish we werent in it. When its bad were sad.
When our clients take a look at their monthly statementsor, worse yet, when they daily pull up their accounts online, they, save for a few, dont see the individual companies they hold. They see the names of funds that assemble the stocks of the individual companies they hold; names that arent what youd call householdnames that dont engender any pride of ownership.
So, while we may be sad when the markets bad, would we indeed be as sad if we knew we owned a company that has a couple hundred billion in cash and utterly dominates the world of wireless deviceseven when its share price is in decline? Well, we might, but we shouldnt. How about if we owned the retailer that is largely responsible for the pain dealt to the market this week by the likes of Macys and Nordstrom? We might, but we shouldnt. How about if we owned the worlds largest and most profitable banks? The chip maker that dominates cloud technology? The leader in home improvement goods? The place where you connect with hundreds of friends you didnt know you had? The company run by the worlds most successful investor? Again, we might, but surely we shouldnt.
If youre our client, herein order of their weighting (taken from a representative client account)are the top 25 companies (out of hundreds) you hold.
Apple Inc Microsoft Corp Amazon.com Inc General Electric Co Wells Fargo & Co Chevron Corp JPMorgan Chase & Co Exxon Mobil Corporation Alphabet Inc Class A (Google) Comcast Corp Class A Home Depot Inc Citigroup Inc Facebook Inc Class A Monsanto Co Cisco Systems Inc Oracle Corporation Berkshire Hathaway Inc Class B Alphabet Inc Class C Capital Stock Bank of America Corporation Medtronic PLC Visa Inc Class A Procter & Gamble Co Intel Corp Boeing Co
Being in a position to own 25 companies that the world assigns over $2 trillion of its annual spending to is, you must agree, a pretty enviable position to be ineven during those inevitable stretches when their share prices are trading lower. I.e., those visions of destitution your brain conjures up during market selloffs simply do not jibe with the undeniable fact that the institutions you own aint going nowhere!
And to close this chapter: If, assuming youre still awake, you need more convincing that the end of the world stories that certain blokes love to tell via the media should be digested with your proverbial grain of salt, this short one from last month ought to do the trick:
It Aint Easy Predicting Bear Markets
My charge as counselor to the folks who entrust their portfolios to our firm is to teach them how to think like long-term investors, which, in todays media-rich world, can be quite the task. When pundits whoby nature of their media exposurehave to know what theyre talking about tell us that theres a 99.7% chance we are in a bear market, that the S&P may fall further 10-15%, that we should go long bonds and short stocks, that theres danger ahead, that equities have another 10% to fall and that now is not the time to buy, it can be tough for little old me to convince our clients to buy and/or hold stocks through the inevitable fluctuations that are part and parcel to the business of long-term investing.
In showing this chart (click to enlarge) exposing the recent miscalculations of todays media darlings, I in no way want to suggest that these chaps are always wrong. I have no doubt that theyve made some very impressive calls during their careers that have ascended them to their present perches.
When Carl Icahn (arguably one of the worlds best investors) issued his danger ahead warning, he said that experts like himself shouldve helped the little guy by sounding the alarm ahead of the 2008 bear market. Problem is, he didnt see it coming either, the hedge fund he managed took a 35% hit that year.
Its gotta be tough being a prognosticator, especially when notoriety comes only when you accurately predict a bear market. The visual below (click to enlarge) tells why predicting higher stock prices doesnt garner much attention, its easy. Stocks tend to rise over the long run. Guessing the red, on the other hand, ain't.
Ill be back soon with more.
Merry Christmas my friends to you and yours!