“Well begun is half done,” the proverb says. And we tend to agree. Since it’s your journey, we don’t like to sweat the particulars: it’s never too early to start, but it’s also never too late.
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The most pertinent warning for investors in the AI age might be, “Trends may not persist.”
We humans tend to believe that current conditions or trends will continue. In recessions, we can scarcely imagine how the economy will ever recover. And when the markets get into bubble territory, it seems the good times will never end.
That was certainly the case in March of 2000, at the peak of the Internet Boom. The S&P 500 had basically tripled in five years and became dominated by large technology companies.
“The internet was going to change everything,” they said—and that story came true.
But valuations had gotten so excessive, the S&P 500 suffered a Lost Decade when the trend changed: it took nearly 13 years on a round trip to nowhere. Fortunately, the S&P 500, composed of the stocks of large U.S. companies, is not the only game in town. Small and mid-sized companies, value stocks, international companies, and other opportunities held up much better, sometimes even making gains during the flat spell.
This history lesson is key to why we are not chasing the index here at 228 Main, especially right now. Looking for bargains, avoiding stampedes—these fundamental principles help us avoid the extremes. Most of us don’t have thirteen years to wait for a market recovery, so it makes sense to strive to be in those parts of the investment universe that are more reasonably priced, now.
As in 2000, the index has become dominated by large technology companies, this time as part of the AI boom. We are paying attention to our principles, mindful that these trends may not persist.
We pay, temporarily, in performance. Our approach has us lagging the S&P 500 recently; we’re not going up by as much, but our efforts now are made in an attempt to potentially go down by less when the bust comes. No guarantees. But we’re turning to history as a guide.
Clients, now as ever, reach out any time with your questions. We’re here to help.
Neither the past performance of the S&P, nor the described methodology, is a guarantee of future returns.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 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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It’s not as simple as “us” and “them.” Whether it’s politics, social issues, or economics, there are real costs when we forget the fundamental truth: we are all connected. This week Mark takes a thoughtful look at how our choices and lives are tied to one another. What’s the future we want to build, together
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by Mark Leibman, Advisor
I learned how to make soup back in the last chapter. Now a variety of soups are a staple of my diet.
Crafting a new soup recipe recently, I started with a chicken, six herbs and spices, and seven kinds of vegetables. I used some olive oil and a splash of red wine vinegar. It may be served with a mix of seven kinds of beans, and rice, of course (you know how I feel about rice and beans!).
It came out really good!—according to a biased observer that I recently married.
Contemplating the choices made in the creation of the soup, I thought about how we build portfolios here at 228 Main.
From many alternatives, we select what we want to own and determine the proportions of each. Another school of thought holds that portfolios should consist of some of everything—500 stocks go into the S&P 500 index, for example, so portfolios get to hold a little of each.
That led me to wonder, What would Index Soup look like?
And it might even be served with 25 kinds of beans, and 10 varieties of rice!
That would have to taste like a little bit of everything, and not much of anything, wouldn’t it?
Just as different recipes can reflect a wide variety of tastes and textures and smells, and we humans have an appetite for different things at different times, our portfolios evolve and change as conditions unfold.
By looking for the best bargains, by avoiding stampedes in the market, by planning to own the orchard for the fruit crop (thinking long-term), our collection of opportunities has diverged from the most popular kind of Index Soup, the S&P 500.
Creating our own recipe helps avoid another possible pitfall of Index Soup—not that it can get too bland in its attempt to average everything, but that it can get too heavy-handed in spicy times.
Recently, slightly more than half of our long-term portfolios are invested in small- and mid-size companies. We’re diversified around the world, although about two-thirds of value is still invested in the U.S. While AI-related stocks have captured the public imagination, we’re focused a little more on value-style stocks than the mega-size growth companies, which we believe may be over-valued at present. No guarantees, but we’re trying to be intentional with our flavors.
Meanwhile, Index Soup focuses on large U.S. companies, with an emphasis on growth. Technology is nearly 37% of the mix in that soup, and the top seven holdings are mega-size tech companies.
We know that the flavor can get “too strong” at times: back in the year 2000, the S&P 500 index, and technology stocks generally, left a bad taste in the mouths of many investors the last time valuations approached extreme levels.
We can’t know the future, but we are hopeful our recipe is going to “taste” a lot better in the months and years ahead. No guarantees—past performance is not an indicator of future results.
But we don’t have to be the best chefs in the world. We’re just trying to find a blend that works for us.
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Investing involves risk including the loss of principal. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.
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by Whitney Engle, Client Services Coordinator
We were talking as a team the other day when Mark brought up a vivid memory from his first summertime job. He worked at Peony Park in Omaha, Nebraska, an entertainment venue that included everything from an amusement park and a swimming pool with a third of a mile of beach, to a dance hall and picnic grounds.
You’d think the first memory to flood back might have been a thrill ride or the Sprite Nite dances. But Mark remembered something else.
Walking through the park each day to get to work at the pool, Mark passed an old fellow, dressed in overalls, working in the flower beds. Day in and day out, the man tended the garden. For a long time, Mark didn’t know what he was witnessing.
Turns out, the Malec family’s early businesses capitalized on a neighboring peony farm: Joe Malec, now of the overalls, was one of three brothers who started what became Peony Park. Fifty years later, it had blossomed into a major force in the community.
As a kid, Mark found it odd. Wouldn’t a founder have more important things to do?
With age comes wisdom. Fast-forward another fifty years: Mark understands why Joe was in the flower beds. Between his own efforts and the help of his descendants, Joe found the freedom to focus on what he enjoyed the most. Sure, tending the flowers wasn’t the flashiest work, but that is how he wanted to spend his time.
Mark doesn’t have overalls, but he too gets to “tend the flowers” now, doing what he loves most: talking with you and trying to find new investment opportunities. He spends half his time in Louisville, the other half working from afar—focusing more on making memories and building relationships.
Leibman Financial Services is now a team of seven, so Mark no longer has to be a jack of all trades. You can reach out to any one of our advisors to get the same service and care as if you were talking to the founder himself. So, if you ever try to schedule a meeting with Mark and he’s not available right away, please remember that just like a farm, the firm is a team activity.
Doing work you love, for a living, is a true blessing. Thank you for being a part of our story.
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How do you measure a year in the life? Our former CEO Mark Leibman is celebrating a handful of exciting milestones! We’d love for you to take a minute to hear all about it from Mark himself.
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What would I have to learn if I could talk to my past self? Or my future self?
There are some mental exercises that might help us reflect on our goals, but here’s what I’m wondering: What do truck stop chili dogs have to teach me?
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What does it mean for our business to be “client-centered”? (Wait, shouldn’t all business be “client-centered”?…) In this week’s video, Mark and Caitie talk about the role the firm plays in our relationships with you, what the client’s job is, and more.
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By Mark Leibman, Advisor
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.
But our work is aimed at picking our spots, looking beyond any one average. We’ve talked about this before in more detail, about what it means to invest in the broad market averages or indexes versus what we’re trying to do at 228 Main.
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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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 averages basically 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.
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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