It was a mediocre start to the year for U.S. markets then it got worse. The S&P 500 dropped 4.6% in first three months of 2025. On the bright side, international and emerging markets rose.

A diversified portfolio was likely flat over the first quarter. So not great or horrible, considering its only three months and performance over the last two years.

That changed on April 2nd. Liberation Liquidation Day started the worst selloff since March 2020. The announcement of massive widespread tariffs — an average of 24% — not seen since the 1930s wiped out any gains over the last three months and added to the losers. It’s moronic, self-inflected, and unnecessary.

If there is a lesson in all of this, it is:

1. Never underestimate the power one idiot has over the global economy.
2. Diversification matters.

The three months to start the year, and especially the last week, bring the point home. We may have little control over the idiocy of those in public office (beyond elections), but we do control how we manage that risk in our portfolios.

The point of investing is as much about protecting the money you’ve already made as it is about growing your money further. Diversification does both…and more.

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Quote for the Week

Ever since the Compagnie d’Occident of John Law (which was formed to search for the highly exiguous gold deposits of Louisiana); since the wonderful exfoliation of enterprises of the South Sea Bubble; since the outbreak of investment enthusiasm in Britain in the 1820s (a company “to drain the Red Sea with a view to recovering the treasure abandoned by the Egyptians after the crossing of the Jews”); and on down to the 1929 investment trusts, the offshore funds and Bernard Cornfeld, and yet on to Penn Square and the Latin American loans—nothing has been more remarkable than the susceptibility of the investing public to financial illusion and the like-mindedness of the most reputable of bankers, investment bankers, brokers, and free-lance financial geniuses. Nor is the reason far to seek. Nothing so gives the illusion of intelligence as personal association with large sums of money. — John Kenneth Galbraith (source)

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The asset class, sector, international, and emerging markets quilts are up-to-date for the first quarter of 2025. You can find interactive versions of each here:

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

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

I’ll have a deeper dive into the data next week. So far, the lesson this year is diversification. You can see this within indexes, like the S&P 500, or in a more broad portfolio allocation.

For example, the S&P 500 lost 4.6% in the first three months (4.3% when you include dividends). Only 39% of the S&P’s component stocks performed worse than the index. 46% had a positive return through March.

The Mag 7, the biggest companies in the index — all tech and praised last year — collectively averaged an 18.4% loss (ranging from -1.6% to -35.8%) and led the decline in the Info Tech and Communication Services sectors. While Energy, Consumer Staples, Utilities, Real Estate, Financials. and Materials sectors were positive. Consumer Discretionary was the other standout loser.

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Quote for the Week

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money— a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally. — John Maynard Keynes (source)

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

• The Art of Worldly Wisdom — Baltsar Gracian was a Spanish priest and philospher in the early 1600s who understood human nature better than most. His Worldy Wisdom offers 300 maxims on fame, fortune, luck, reputation, wisdom, and more. It can be read in bite-sized pieces. (Notes)
• The Lords of Creation — Tells the history of business and finance from the late 1800s to the depths of the Great Depression. You get stories like the creation of U.S. Steel, the fight over the Union Pacific, and the attempt to corner United Copper. It’s a history of power, greed, concentrated wealth, willful irresponsibility, and financial crises. Notes to come.
• The Usefulness of Useless Knowledge – The book contains Abraham Flexner’s timeless essay of the same name and an introduction to the piece. Flexner warns of attempts to control and mold science rather than going wherever curiosity leads. Many discoveries and inventions are the byproduct of what Flexner called “useless knowledge” gained from chasing curiosity. It’s a timely piece. Flexner’s essay can also be found via Google.
• Innumeracy: Mathematical Illiteracy and Its Consequences — A fun little book for anyone who likes numbers, or is curious about stories with numbers, and why we are horrible at comprehending big numbers, small numbers, fractions, probabilities, and more. The consequences: we misjudge risk, believe claims easily refuted, and just make poor decisions. It’s similar to Darrell Huffs, How to Lie with Statistics. Notes to come.

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Quote for the Week

Graham was concerned with limiting his risk and he didn’t want to lose money. People don’t remember what happened before and how things were. And that’s one of the mistakes people make in investing as well.

In the last 15 years, it’s been a remarkable stock market. But people forget what things were like during the 1930s. I think Graham – because he lived through that period – remembered it, was scared it would happen again and did everything he could to avoid it.

But in the process of avoiding it, he missed a lot of opportunities. That’s one of the problems you always have — you don’t really lose, but you don’t really make, either. I believe you should remember what took place — even if you weren’t around at the time. One of the problems of a lot of the people who went through the Depression — Ben Graham, Jerry Newman and others — is that they keep on thinking that things will always be like that.

Even Graham used to say — and quite correctly — that you can’t run your investments as if a repeat of 1932 is around the corner. We can have a recession and things can get bad. But you can’t plan on that happening. People who did missed this tremendous market. — Walter Schloss (source)

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