Quote for the Week

If you believe — as I have always believed — that the value approach is inherently sound, workable, and profitable then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, its illusions, and its constant chase after the fast dollar. Let me emphasize that it does not take a genuis or even a superior talent to be successful as a value analyst. What it needs is, first, reasonable good intelligence; second, sound principles of operation; third, and most important, firmness of character. — Ben Graham (source)

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Quote for the Week

One of the studies that I did for my first book, “Pioneering Portfolio Management,” looked at the behavior of endowments and foundations around the crash in October 1987… There was a huge rally in treasury bonds on October 19, 1987. So, stocks were cheaper and bonds were more expensive. Well, what do you do? You buy what’s cheap and sell what’s expensive. But what did endowments and foundations do? Well, if you look at the annual reports of their asset allocation, in June of 1987, their equity allocation was higher than it had been for fifteen years. The ’70s were a terrible time to invest in stocks, a bull market had started in 1982. We were five years into this bull market and people were getting excited about the fact that stocks were going up and equity allocations were at a fifteen-year high. Of course, the money had to come from somewhere, so bond allocations were at a fifteen-year low.

Fast forward to June 30, 1988 and stock allocations had dropped and, not only had they dropped, they dropped by more than the decline in stock prices associated with this collapse in October 19, 1987. Bond allocations had increased by more than could be explained by the increase in bond prices over the course of the year. The only conclusion that you could draw is these supposedly sophisticated institutional investors sold stocks in November and December and January because they were fearful and they bought bonds in October, November, and December — maybe because they were fearful or maybe because they were greedy. Emotion ruled the decisions, not rational economic calculus. The costs were huge — not just the immediate costs in terms of the move from stocks to bonds. It took these institutions until 1993 — a full six years — to get their bond allocation back down to where it had been prior to the crash in October 1987. And this is in the context of one of the greatest bull markets ever… For a full half-dozen years, in the midst of this bull market, colleges and universities were over-allocated to fixed income relative to where they had been in June of 1987. — David Swensen (source)

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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…