Quote for the Week

We all know that if we follow the speculative crowd we are going to lose money in the long run. Yet, somehow or other, we find ourselves very often doing just that. It is extraordinary how frequently security analysts and the crowd are doing the same thing. In fact, I must say I can’t remember any case in which they weren’t.

It reminds me of the story you all know of the oil man who went to Heaven and asked St. Peter to let him in. St. Peter said, “Sorry, the oil men’s area here is all filled up, as you can see by looking through the gate.” The man said, “That’s too bad, but do you mind if I just say four words to them?” And St. Peter said, “Sure.” So the man shouts good and loud, “Oil discovered in hell!” Whereupon all the oil men begin trooping out of Heaven and making a beeline for the nether regions. Then St. Peter said, “That was an awfully good stunt. Now there’s plenty of room, come right in.” The oil man scratches his head and says, “I think I’ll go with the rest of the boys. There may be some truth in that rumor after all.”

I think that is the way we behave, very often, in the movements of the stock market. We know from experience that we are going to end up badly, but somehow “there may be some truth in the rumor,” so we go along with the boys. — Ben Graham (source)

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The story in the first half of 2024 was Big Tech, AI, and the market concentration in the Magnificent 7. That story changed in the third quarter. Some are calling it “the great rotation.”

You see this rotation in the returns over the last three months. What drove the S&P 500 returns, for example, from January to June was mostly flat from July to September. The Info Tech and Communication Services sectors were the best-performing market sectors by a massive margin through the first half of the year. Three months later, they no longer sit on top. The Utilities sector is the best performer year to date due to a 19.4% rally in Q3. And utilities were one of several sectors that rallied this past quarter.

That same rotation can also be seen in U.S. REITs (16.8% gain in Q3) U.S. Small caps (9.3% gain in Q3), Emerging Markets (8.9% gain in Q3), and International Markets (7.3% gain in Q3) indices. Each outperformed the S&P 500 over the last quarter.

While there is no guarantee this continues, it’s a sign of a healthy market when money seeks out cheap over expensive. It’s certainly better than a FOMO-driven market where money chases a handful of stocks simply because they went up a lot.

If anything, the past three months have been a great reminder of the benefits of diversification and why timing the market is a losing proposition. Asset classes, sectors, and global markets move in and out of favor. It’s impossible to guess when or for how long these cycles last. Continue Reading…

Quote for the Week

The popular view of diversification is not putting all your eggs in one basket. If you place all your bets on one holding, you can win big or lose big, but the possible range of outcomes is wide. If you spread your bets across a number of holdings, the odds are that you will not be wrong on all of them or right on all of them. Then the range of outcomes will be narrower.

Or will it? Suppose all those holdings you bet on move in sympathy with one another. If you had held all 50 of the “favorite fifty” in the early 1970s, your portfolio would not have been diversified at all: Those 50 stocks went merrily up together and horrifyingly down together. The 50 holdings acted like one holding.

The first lesson of Modern Portfolio Theory is that diversification has more to do with seeking assets whose prices move in different kinds of rhythms than it has to do with proliferating the number of baskets in which you carry your eggs. A few holdings with radically different types of market behavior will do more to smooth out the pattern of portfolio returns than 50 or 100 holdings that move up and down together. — Peter Bernstein (source)

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The asset class, sector, emerging, and international market quilts are up-to-date through the third quarter of 2024. A few unexpected things stand out.

Interactive versions of each table can find at these links:

• Asset Class Returns
• Sector Returns
• International Market Returns
• Emerging Market Returns

You can also download copies here or grab the images below.

The biggest benefit to visualizing returns in a table format is seeing the power of diversification over time and how difficult it is to predict the best-performing asset classes, sectors, and markets in any given year. So far this year’s been a great example.

Did anyone predict utilities would be the best-performing sector year to date? Yet it tops the list, outpacing big tech through September. Continue Reading…

Quote for the Week

A phenomenon Ben Graham talked about over and over again. He said, “It’s not the bad ideas that do you in, it’s the good ideas.”… He meant that if a thing is a bad idea, it’s hard to overdo it.… You’ll recognize it as a bad idea, so it’s not going to cause much investment trouble. But where there is a good idea with a core of essential and important truth, you can’t ignore it. After all, it’s a good idea with important truth in it causing big effects. And then it’s easy to overdo it. So the good ideas are a wonderful way to suffer terribly if you overdo them. — Charlie Munger (source)

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Here’s what I’ve been reading for the past three months:

• The Autobiography of Andrew Carnegie — Carnegie’s approach to business was different. He thought big at a time when most industrial companies were small and privately owned. His autobiography covers his rise from Scottish immigrant to bobbin boy to telegraph messenger to building a steel empire to becoming the richest person in the U.S and giving it all away. While Carnegie paints himself in an obvious positive light at times, the book offers insights into the early adoption of modern business practices. (Notes)
• Fortune Tellers: The Story of America’s First Economic Forecasters — The early 1900s saw a rise in market and economic forecasters. The book presents biographies of the five biggest forecasters of the 1920s. Roger Babson and Irving Fisher were the biggest. John Moody, Herbert Hoover, and others played a prominent role, as well, in shaping the forecasting industry, economics, and social discourse during a massive market boom that ended in the 1929 crash. None turned out to be very good at it. By the time the Great Depression was well underway, all five had quit the forecasting business. (Notes)
• The Forgotten Depression 1921: The Crash that Cured Itself — A deep depression hit the U.S. after WWI and set the stage for the Roaring 20s. The book covers that period and the government’s response (or lack of response in this case) to correct it. I set this book down a few chapters in because it covers a similar period to that of Fortune Tellers — too much history — but will revisit it after the next book is finished.
• My Life and Work — Henry Ford shares his approach to business — production, eliminating waste, wages, etc. — in his 1922 autobiography. Notes to come once the book is finished.

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