The story of markets is one of transition. Bull markets, taken to excess, lead to bear markets and back again. The first half of 2022 saw the transition to a bear market in stocks.

Yet, investors expecting their bond allocation to pick up the slack due to the decline in stocks were disappointed. Uncertainty around inflation and rising interest rates negatively hit bond prices, making it one of the worst starts to the year for both stock and bonds.

Bear markets are never enjoyable but they have some benefits. First, bear markets wash away the widespread complacency and easy money mentality in late-stage bull markets. Investing is never easy, but there are moments in the market cycle where it appears that way. Investors who confuse ease with a rising market get punished the most when the market turns.

Second, bear markets test your tolerance to drawdowns. If the performance of your portfolio makes you queasy, now is a great time to tweak your asset allocation to something you can stomach. This is especially true if this is your first bear market. Remember, you’ll never eliminate losses from your portfolio. The key is to find an asset allocation that fits your risk tolerance so you can stick to it in good times and bad.

Third, bear markets are long-term buying opportunities. Investors who diligently add new money to their portfolios every month bought stocks at lower and lower valuations over the past six months. And lower valuations lead to better returns. Continue Reading…

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

• The Great Depression: A Diary – Benjamin Roth was an Ohio lawyer who lived through the Great Depression. In 1931, he realized that the country was going through a financially significant moment, so he began a diary. The book is a collection of his diary entries that describe how people coped with the economy and financial markets from 1931 to 1941. It’s a great book for financial history buffs. (notes)
• There’s Always Something to Do – Peter Cundill was a Canadian investor who outperformed the market over his career. He happened about Graham’s deep value approach and applied it globally. The book covers Cundill’s investment career, dives into specific investments, and frequently pulls directly from his journal entries, which he kept for 45 years. (notes)
• Lessons from Century Club Companies – It’s a perfect little book for investors and business managers based on a study of 100-year-old companies. The author covers the unique characteristics that allowed these companies to survive for over a century. (notes)
• High Returns from Low Risk – The author explains why the low vol anomaly exists and offers one example of how to build a portfolio to take advantage of it. I’ve been testing a low vol strategy and read the book to confirm I was on the right track. (notes)
• Your Complete Guide to Factor-Based Investing – The Guide filters the factor zoo down to the most persistent factors like size, value, momentum, and quality. The author then breaks down each factor by summarizing the research, why it persists, and how it fits in a portfolio. The book is perfect for anyone who wants an intro to factor research or to fill in any gaps from the research you might have missed.

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It’s been a rough year for markets as we edge closer to the halfway point of 2022 but it may not be all bad news. There is some upside to bear markets.

The S&P 500 exceeded a 20% loss year to date before recovering slightly last week. The Nasdaq did the same with a 30% loss.

Of course, the losses should not be surprising at this point. The bloodbath in certain Nasdaq stocks has been well documented, which explains why its performance is worse than the Dow and S&P 500.

But it’s not all bad news for investors. Lower stock prices bring lower valuations. And, broadly speaking, lower valuations lead to higher returns going forward. Continue Reading…

Stock markets have a long history of fraud and grift during bull markets. Grifters find it easier to entice would-be “suckers” when everyone seems to be making a fortune but them. One such example took place at the start of the 1900s that has played out in some form or another in every bull market since.

Stock promotion was legal at the turn of the century. Promoters pumped new companies in order to raise money in exchange for a cut of the total take. In some cases, their cut was upwards of 40%. A promoter could walk away with over $100,000, on a $1,000,000 stock offering, after paying promotional fees for advertising and articles pumping the stock.

The 1901 stock promotion boom was the byproduct of a speculative bull market. Two years early a merger mania began as Wall Street power players combined railroad and industrial companies into regional and national monopolies. Speculators saw an opportunity to get rich quickly in the millions of new shares created by the mergers.

The mania briefly sputtered with the North Pacific panic before going wild in a stock promotion boom in 1901. Over the course of two years, hundreds of new companies were created and promoted to unwitting investors. Continue Reading…

The average life of a company is shrinking. Today, the average age of an S&P 500 company is 15 years. That compares to 67 years in the 1920s. Yet, outliers exist that defy that trend.

One such group of outliers is known as the Henokiens. To be a Henokien, a company must be founded over 200 years ago and still controlled by the founding family. There are 48 member companies in the group.

What does it take for a company to survive over 200 years? Lessons from Century Club Companies answers that question. The author, Vicki TenHaken, studied companies over 100 years old to see what characteristics set them apart from all the rest.

Interestingly, her results carry some crossover lessons to investing. It starts with having a mission statement.

Live the Mission Statement

Long-term success is the byproduct of a company successfully working its mission. Every century-old company has a written mission statement that led the company to where it is today. Continue Reading…