Quote for the Week

The world seems to be subject to curious brainstorms — the crusades, the Mississippi scheme, and the south sea bubble, are examples. Let me quote from Mackay’s Popular Delusions, referring to what he calls the Tulipomania of the seventeenth century:

Everyone imagined that the passion for tulips would last forever… The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favored clime of Holland. People of all grades converted their property into cash and invested it in flowers. Foreigners became smitten with the same frenzy and money poured into Holland from all directions… Holland seemed the very antechamber of Plutus.

You will recognize some of these expressions. It seems incredible that so solid a nation as the Dutch should nearly ruin itself on such a thought, but is it any more credible than that we would go into debt to pay thirty times earning power, and even more, for common stocks of the “New Economic Era” on the theory that we also were going to ”banish” poverty by selling billions in manufactures to an almost bankrupt world by the expedient of continually lending our customers more money?

We built up a tinsel tower of paper prosperity out of debts and speculative hopes and such other things as dreams are made of. It lies in ruins, but the debts remain. What shall we do? Are we to try to put, or keep, substance in things which had no substance in the beginning, or shall we clear away the wreck? I think our duty is clear, and that in taking it we must remember that delusions swing between extremes, like pendulums. Delusions of grandeur and unending wealth give place to delusions of unending gloom. One is as unreal as the other. — Bernard Baruch (source)

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Fifteen years ago, the U.S. stock market was nine months removed from its lowest point this century. The subprime mortgage crisis shook the world and panic spilled into the stock market.

Nobody knew it then, but the market bottomed in March 2009. From 2010 to the end of last year, the market went on an unreal run that nobody expected because stocks were the last place anybody wanted to put their money.

Contrast that period to today. U.S. stocks are all anyone talks about. Not international stocks. Not emerging markets. Not bonds. It’s U.S. stocks, specifically large cap tech.

Humans are weird like that. Hindsight softens the blow of the worst market moments with every passing year, making it easier to forget how risky assets like stocks can be, especially when recent performance is exceptional.

And the S&P 500 has been exceptional. It’s seen double digit returns each of the last six years. One of those years was an 18.1% loss. Of the other five years, one was in the teens at 18.4%, the rest ranged from 25.0% to 32.5%.

2018 was the last time the S&P 500 had a single digit return. It was a 4.4% loss, the first losing year since 2008. The S&P 500 followed up the worst financial crisis since the Great Depression with a 13.9% annual return and only two losing years through 2024.

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Quote for the Week

As Justice Holmes pointed out, though, “Certitude is not the test of certainty.” What I believe will happen in financial markets and what ends up happening have no necessary relationship. The future is uncertain, and the returns investors earn will depend on the nexus of actions taken and how events unfold. Financial history provides just that: history. Its ability to inform how we think about the future and to affect how we position assets would be dispositive if it were not for the most important feature of capital markets: nonstationarity.

Nonstationarity refers to the degree to which the future does not resemble the past. If it were not for nonstationarity, we could just look to the past and unfailingly predict the future. The richest people would be those with the best databases. Librarians would be firing young aspirants to wealth on reality TV shows. Nonstationarity means that investment judgments are probabilistic and that even the best investment process will lead to undesirable results from time to time. Investment theorist Peter Bernstein noted that even if the expected value of the future were known with certainty, the standard deviation around that value would guarantee results that diverged from the averages, sometimes dramatically, and not always positively. — Bill Miller (source)

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It’s time to wrap up 2024. Every year, I do a quick review of the blog. It’s a way to highlight some things you might have missed and some of the greatest hits that gained the most traction.

This year, the blog grew by:

• 68 new blog posts. The most read are below.
• 12 new book notes. That brings the total to 96 books.
• 91 new quotes. There are 1,171 quotes in the collection. Peter Lynch and Risk Management quotes were the most popular in 2024. Same as last year.
• 113 new pieces in the Library.
• 89 longer quotes from those pieces added to the Notebook. There are now 1,387 sorted by investing topic and author available to members.

I also joined BlueSky a year ago and started posting recently. It’s the less toxic version of Twitter. Bluesky lets you control the algorithm, for now at least, based on who you follow, block, etc. You have a choice. The algorithm is not forced on you. So far it’s more useful in finding relevant, interesting discussions on investing, finance, and economics without the emotional manipulation pushed into your timeline. Check it out and follow along if you’d like. I plan to be most active there going forward.

Fifteen years of writing have taught me that it’s anyone’s guess what happens after I hit publish. What post gains traction? Which falls flat? It’s as unpredictable as markets. It’s also a fun surprise to see what you, the readers, find most interesting. So thank you for reading and sharing! Continue Reading…

Quote for the Week

One of the first lessons I heard about pendulums and the swing of investor behavior regarded something I was taught in the early 1970s: the three stages of a bull market. These succinctly capture the essence of investor psychology.

The first stage comes when a few people begin to realize that there will be improvement. The second stage occurs when most people realize that improvement is already taking place. The third stage comes when everyone thinks that things will be getting better forever. Clearly, the first is early; the last is laughably late. One of my favorite adages – perhaps my favorite of all – is that what the wise man does in the beginning, the fool does in the end. So it’s the buyer in the third stage – who buys when optimism is incorporated, under the assumption that things will always get better – who pays the price. — Howard Marks (source)

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The story of 2024 began with worries about market concentration in the Magnificent Seven only to have the least techy sectors stand out by year’s end.

Both the S&P 500 and Nasdaq are up close to 26% year to date. Including dividends adds a couple of percentage points to that. It’s been a phenomenal year for U.S. stocks.

International (EFA) and emerging markets (EEM) fell short of the US. Both started the year well — exceeding double-digit returns through September. Then came the dip. The disconnect in performance between US and international stocks is ongoing for over a decade. In fact, since 2009 (to 2023) the S&P 500’s total return is almost twice that of the MSCI’s international and emerging market indexes. These things tend to move in cycles, so it will be interesting to see how much longer it continues. Continue Reading…