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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Quote for the Week

The most famous comment about the long run was Keynes’s quip that in the long run we are all dead. Keynes was really arguing that, in a system that is naturally volatile and characterized by uncertainty, most of us simply do not have the time on earth required for economic and financial variables to regress to their long-run means. We are inevitably trapped in the short run.

The difficulty arises because the long run is not a homogeneous state of the world, a smooth and straight line into the future. The long run is the average of a set of heterogeneous states of the world. We have no reason to expect that what lies ahead in our lifetimes is going to match precisely the average experience that the so-called long run represents…

While we can learn from the long run about how bonds and stocks respond to changing environments and to each other, the long run can tell us perilously little about what kinds of environments lie ahead. On that point, I maintain, we have to accept uncertainty rather than fighting it: we must rely more on judgment than on economic models. I agree with Nobel Laureate Kenneth Arrow that “Our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty.” — Peter Bernstein (source)

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