I took a walk one weekend in Lincoln, Nebraska—I walk a lot and enjoy exploring. I like to pick one of our many trails in town, park next to the closest coffee shop, and walk in one direction for a few miles, then turn around. But this particular weekend, I picked a new trail, one that led outside of the city. This time I wanted a little more time to think, and I ended up a little farther out than normal.
When I checked my map, I saw that if I went about a mile more, I would find myself in Walton, Nebraska.
Why not? I’d never been to Walton. But my choice to go to Walton turned my typical one-hour walk into a two-hour walk.
Still two miles from the car, my legs started to get wobbly, and my face flushed. Had I pushed it too far? Anxiety started to gnaw at my confidence. “I’ll be stranded out here,” I thought. “If I pass out, who will find me?”
At this point, I just needed to stop and assess the situation. I found a place to sit for a few minutes, had a gulp of water, and took some focused breaths. After five minutes, I was ready to restart my journey, one step at a time.
Turns out, I wasn’t in danger. I just needed to take a break, reassess, and breathe.
This happens in the shop sometimes, too. For example, when we see portfolios decline, the first reaction can be just like the scary one I had on the trail. But the next step isn’t to assemble the research team to sell out: the next step is to pause and assess the situation. What’s in the companies’ filings that might have caused the markets’ reaction? We need to form our own understanding of the situation.
Covering new ground can make it feel like we’re too far from safety. But there’s a big difference between real danger and perceived danger.
The next time you find yourself in one of these spots, it’s okay to pause and reassess. Is what I’m thinking and feeling real? Or is it just a perception that needs another look?
And know that the team here at 228Main.com will be doing the same.
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Our long study of “the market” has taught us that it’s more of a market of stocks, less of a stock market. Each company has its own story and charts its own path. People often use the broad market averages as a shorthand, a quick way to check how things are doing, generally: “the market” might actually refer to the companies listed on the Dow or to ones in the S&P 500, for instance.
Part of our approach is about spotting the patterns. We keep an eye on parts of the investment universe that seem to run in long cycles. For instance, since 2015, the largest investable companies have dramatically outperformed smaller companies, with more than twice the gains in general. (The biggest of the big are all over the news these days, with hopes and/or hype of AI dominating the chatter.)
A similar thing happened in the 90s, when internet stocks dominated. Their run ended with the “Tech Wreck,” in 2000. Back then, while the big tech stocks got crushed, other parts of the market did much better. In the years that followed, smaller companies did a far better job of delivering gains. In fact, smaller companies outperformed from the market peak in 2000 until about 2015—seemingly, when the current cycle began.
Notice how we’ve said nothing so far about “timing the market.” A strategy that requires precise timing is not sustainable. In fact, it’s impossible: we can’t pretend to know ahead of time the exact right day to change course.
Instead, there is so much potential advantage in preparing for the inflection point, rather than predicting it. We can assemble the building blocks that may be most useful in whatever part of the cycle comes next. After all, the next part of the cycle is always on its way.
Clients, you know I’ve had a lifelong obsession with the markets. Our research team, to this day, is informed by a quest to seek the best bargains and a general principle of avoiding stampedes. It is these things that can potentially help set us up for life on the other side of the trend change, once it happens.
What’s got our attention? The research team at 228 Main is noticing high valuations in the big company indicators like the S&P 500. Market value seems to be concentrated in the biggest companies, perhaps in a way we have not seen since the 2000 inflection point. And we are finding possible bargains in smaller companies, and value stocks, and in other geographies around the world.
They say nobody rings a bell at the turning points… but consider it rung. We believe we’re close enough, that we’re far enough into inflection point territory, you could say.
As a result, our portfolios right now are reflecting diversification that will hopefully make greater sense in the months and years ahead. The future is going to be different than the past, even though we humans tend to believe current trends and conditions will persist.
Owning the 500 or the biggest U.S. equity funds may provide a very different experience in the years ahead. A decade or so of outperformance, megacap versus smaller companies, will sooner or later come to an end.
We believe it’s a great time to rethink the tactics that have worked so well for the past decade. No guarantees, of course. We have a crystal ball, but it does not work. Instead, what has tended to serve us well are the enduring principles we use in our work: avoid stampedes, look for the bargains, own the orchard for the fruit crop.
This is a call to think about it, not a call to buy or sell anything. And second opinions are always available at 228 Main.
Clients, call or write if you or anyone in your life would like to talk more about this.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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There are many ways to get the job done. Whether the job is getting dinner on the table or investing for retirement, rarely does it ever come down to an ultimatum, something like, “If you can’t stand the heat, get out of the kitchen.”
What if you just need a different recipe?
Join Billy for a walk, as he shares his thoughts about how to switch things up in this week’s message.
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When people talk about “the stock market,” they might actually be thinking of the Dow Jones Industrial Average, or the S&P 500 Index. These lists are what they sound like: averages and indexes of exchange-traded securities.
And one popular school of investing calls for buying index “funds,” collections that offer a slice of what’s happening on one of those lists. The goal is to capture the list’s average return. It’s simple, easy, and relatively inexpensive to seek to replicate those market averages.
But there’s a tradeoff. There have been extended periods when those averagesbasically went nowhere for many years at a time. The “average” approach means you are by definition going with the crowd. But crowds can become herds, which can turn into stampedes.
This is what happened with the raging Nifty Fifty and again in the Tech Wreck.
Back in 1973, the “Nifty Fifty” stocks were all the rage. Many scrambled to buy and hold these dominating stocks, names like IBM, Xerox, or Coca Cola. One might say there was a stampede into the favored names. Valuations got stretched, the S&P 500 peaked—and proceeded to fall about 50%.
It took until 1982 to regain that 1973 peak, before moving any higher: a decade with essentially no progress.
It happened again from March 2000 to 2013, a time that got the nickname the “Lost Decade.” This time, the mania was internet stocks. Technology and communications companies dominated the S&P 500, and investors got excited. Again, more people stampeded in, valuations got stretched, the S&P 500 peaked—and proceeded to fall about 50%. Not until 2013 did the index begin to make and hold new, higher ground.
So what was problematic about those peaks? The largest companies became a much larger fraction of the total value of the S&P 500. The top companies in 1973 and 2000 had become worth many times the bottom companies combined.
Staying with the crowd—buying indexes and aiming to capture averages—is not the only way to invest. In those episodes from history, some other sectors fared better than the fallen favorites and broad U.S. market averages. There were those smaller companies, value-style investments, and overseas markets that generally went up during the Lost Decade.
At 228 Main, our core investing principles include “avoid the stampede” and “seek the best bargains.” As such, while the largest companies in the S&P 500 are becoming increasingly concentrated at the top—reminiscent of 1973 and 2000—valuations may be getting stretched once again. We are seeking to have more and more of our portfolios invested other places. (Research is a core activity here, a daily discipline, and we invest a lot of time and energy into it.)
That is to say, we’re seeking opportunities outside the averages. We’ve got our eye on value-style companies—those that seem to provide a lot of current profits, or cash flow, or dividends relative to each dollar invested. We’re seeking companies operating in faster-growing economies, the ones that provide food, shelter, transportation, communications, or energy (and are trading at more attractive prices). We want to know what’s happening with smaller companies, the opportunities that don’t fit the profile of those mega-sized names that dominate the market averages today.
There are tradeoffs involved with either approach.
When we follow the averages, we risk following the crowd straight into a stampede.
When we buy the bargains, our particular favorites may get cheaper while the darlings of the market are still climbing higher. Our portfolio performance could generally lag a red-hot market.
To be clear, we are still invested in those large U.S. growth companies we’ve mentioned. But, clients, we’re more diversified now than we’ve been at any time since the early 2000s. Even though we may be on the right track for long-term investors, it can be lonely to be contrarian. So it’s times like these that it helps to check in, take the long view, and make sure the methods suit the goals.
And for us, it’s the pursuit of capturing the potential growth, for the long run. No guarantees, but that’s what we’re working toward.
Clients, please call or email us if you would like to talk about this or anything else.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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Money you accumulate can work like an orchard, and the income—the fruit crop—helps run retirement life. Some in the industry would call clients taking out their own money “attrition.” Attrition, per the dictionary: “loss or destruction, corrosion, waste.” But to us, it’s simply investing wisely, spending well. Attrition, shmattrition.
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Money you accumulate can work like an orchard, and the income—the fruit crop—helps run retirement life. Some in the industry would call clients taking out their own money “attrition.” Attrition, per the dictionary: “loss or destruction, corrosion, waste.” But to us, it’s simply investing wisely, spending well. Attrition, shmattrition.
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Converse, communicate, babble, blather, rant, rave… I love to talk! Preaching to the choir, but it’s worth reminding everyone: I’m here to do this. By choice. More in this aptly-titled video.
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My birthday is approaching, and I’m ruminating about the meaning of another year in the life—but you already know how much I like to take a step back, get the big picture, and imagine the long view.
22, 44, 66—or, my life in thirds.
I’m thinking about my life in thirds: 22 years of getting ready, 22 years of gaining experience, and 22 years building this lovely enterprise at 228 Main. That’s right, I’m turning 66, wondering what the next 22 years will bring.
It feels like the years ahead will be about growing the team that runs the firm, building capabilities and capacity, putting the next generation in position to do better work than ever for you—and for the coming generations, too.
While we work to refine our methods and strategies and tactics, we’ll honor the same principles we always have, and we’ll live by the same values: the better off you are, the better off we will likely be. So the center of our work will always be about striving to grow your buckets, to focus on your outcomes.
I’m down to my last 26 years now… Mark your calendars for the retirement party: May 27, 2048!
I appreciate you for being with me on this journey thus far. Thank you. I would not trade my spot with any of the other 7 billion of us, it’s been so good.
Stop in and see us, anytime.
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It is that time of year! Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds? Some forecasts are hedged, don’t really say much.
But our prediction is quite specific.
For those who have visited our offices, you know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.
If you knew which way the stock market was going to go, could you make money investing?
Here’s the catch: our crystal ball has only been 74% accurate. So perhaps the question should be, “If you knew which way the stock market was going to go 74% of the time, could you make money investing?”
Without further ado, here is what our crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.
Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, this prediction has been right 74% of the time.
We can’t know how well the track record will hold up, but we believe this presents a favorable backdrop against which to buy bargains, to avoid stampedes in the markets, and to seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our principles and plans and strategies. And remember the long haul sets its sights beyond the coming year.
It is tempting here to include a discussion of the economy, the strengths and weaknesses we perceive at this moment. We’ll leave that to people with more time on their hands.
But if your plans are evolving and deserve some attention in the new year, please email us or call.
Cheers to 2022, friends.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
Investing involves risks including possible loss of principal. All performance referenced is historical and is no guarantee of future results.
Any economic forecasts set forth may not develop as predicted and are subject to change.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
All indices are unmanaged and cannot be invested into directly.
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