“Skate to where the puck is going, not where it has been.” – Wayne Gretzky
This year’s election season was one for the record books. Record votes cast and record controversy. And the political action is still not over with a runoff election in Georgia which will decide control of the US Senate and a sitting president likely to become the first in modern history to not concede the election. This climatic election season came at the tail end of an especially tumultuous year. We had a worldwide pandemic and rioting in many cities across the US.
Throughout this year we have encouraged investors to stay disciplined throughout the chaos. That is much easier said than done. We commend those that were able to stick with their long-term financial plan. Many investors bailed at the wrong times this year and, despite what your coworker or neighbor tells you about their shares of Tesla or Bitcoin, the vast majority of investors were not able to stay disciplined long enough to reap the rewards of the stock market.
For those few that did stick with their plan they have been rewarded. Especially post November 4th and since the announcement of a vaccine. Many markets have surged, especially beaten down asset classes like value and international stocks. Small value is up nearly 20% since the election.
Now, the burning question on every investor’s mind is: “Where do we go from here?” Small value has skyrocketed since November and International stocks have outperformed as well, but large growth and tech stocks are still significantly outpacing everything since January, even though their valuations are as rich as they have ever been. It seems the time to enjoy the post-election market bounce was short lived and now there are new market anxieties to stress over.
So, what is the answer? How do we invest going forward? I think there are two key takeaways from the current market environment:
1) “Skate to where the puck is going, not to where it has been.”
I have been taking our 4-year-old, Luca, to indoor soccer the last couple months. The coach tries his best to spread the players out and emphasize the importance of spacing, but as soon as the ball is put into play the kids converge like wild piranhas. Never mind that they may be sprinting away from their goal. As the pack converges towards the ball they run faster and more aggressively in the wrong direction. This is very common in many child sporting events, no doubt, and hence the popularity of Gretzky’s famous quote.
Adults are not much different when it comes to investing. Investors tend to chase hot stocks and high performing asset classes which tends to work for a while as people bid up already expensive asset classes. But, ultimately, chasing expensive investments ends badly for most, as fundamentals finally win out and the high-priced stocks come crashing to earth.
The best way to avoid this fate is to be a value investor. Value investing is by definition a contrarian strategy. While the market piles into overcrowded trades, the value investor actively avoids where the “puck” has been and allocates money to where it is going. The rewards to this strategy take much longer than a 60-minute game to come to fruition. The crowd may push overpriced stocks higher for years, so it requires discipline and a long-term view, but for those that can avoid chasing the puck they are well rewarded in the end.
2) Stay Disciplined and Diversified.
There is a story of two fund managers in the late 90’s. One was confident the exploding stock market, specifically in internet stocks, was a bubble and he actively got out of all internet stocks. The other manager was confident that tech and internet stocks were the future. He invested the entire portfolio into these companies.
The first manager drastically underperformed the S&P 500 for several years through the end of 1999. He underperformed so significantly he lost his job and his investors cashed out.
The second manager had a tremendous run at first, enjoying significantly above average returns through the year 2000, but then the bubble finally burst, and he lost nearly 50% over the next 2.5 years and ultimately got fired for that result.
The takeaway from this story is that it is incredibly hard to predict the future trajectory of any one investment or asset class and taking big bets in any direction can blow up, even if you are eventually proven right. Currently, parts of the US market appear very overvalued, international and emerging markets seem undervalued, and value stocks look the most appealing they have been since just prior to the tech bubble. Making a bet on any one part of the market would be a mistake. Even if you are “right” the market can move in the wrong direction longer than you can keep your bet going. Maintaining a well-diversified portfolio will still buy more attractive asset classes through disciplined rebalancing, but you will never put your retirement on the line for a single bet. Instead, let the slow and steady compounding of the market do its job and control your risk with proper diversification.
This advice probably has a familiar ring to it. If so, that is because solid investment principles do not change before or after an election. Proper investing is simple, but it is not easy. Do not let anyone tell you in hindsight that 2020 was an easy year to be an investor. Many individuals, and advisors, made mistakes leading up to the election. They forgot the fundamentals of investing and either let fear or greed control their actions. If you are one of the few that has kept with your investment plan you deserve a pat on the back. And even if you have made mistakes, it is never too late to develop a plan going forward. Now is the time to review or create your plan. Without a plan to fall back on, we will always be susceptible to making big mistakes.
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