The Wrong Way To Invest

In the early 2000’s a prominent investment management firm launched an advertising campaign that irks me today as much as it did back then.  It’s title, “…the Right way to invest”.  The advertiser stated this emphatically and confidentiality as if there was one and only one way to invest and they had the correct recipe that no one else did.  Investors, this is utter nonsense, and if you hear your investment manager claiming they do it right and everyone else does it wrong, you had best pack up your money and find another manager as there is no single “right way to invest”.  There is no absolute in the business of managing money in public markets.  In my opinion, the only “right way” is to try to meet the goals and objectives of your client base while setting realistic expectations up front.

 And with that sermon behind me, I put away my soapbox and I give you this week’s video title, “the Wrong way to Invest, chasing fads, chasing styles, and chasing performance”. Having been entrusted by clients to professionally manage large sums of “other people’s money, also called “OPM”, to actually pull the trigger, to manage risk and reward not just on a spreadsheet or in a report, but in the real public equity markets for almost 30 years now, it’s safe to say I’ve made my share of mistakes over the years.  In fact, when an institutional salesperson solicits myself and OHFG now days about their new or improved financial product, it’s safe to say that the vast majority of the time, I am quick to pass on the new thing.  I often tell prospects “I’ve learned enough ways to lose money over the last 30 years, I don’t need another one”.

Investors, turn on the TV and you’ll see almost every strategist, newsletter writer, or analyst give you their opinion on “how to make money in stocks and the markets”.  Almost no one focuses on what not to do.  Over the course of my career, a career in which I have managed, or helped manage, virtually every size and style of public equity, from large cap aggressive growth stocks heavy in technology to small and micro-cap value stocks, from large institutional mutual funds in the $10’s of billions, pensions fund accounts, or  long short hedge funds, or as I am now at Oak Harvest, smaller individual RIA portfolio’s, the absolute best way I have found to lose money in the stock markets, or miss your goals and objectives is to let your emotions control your actions and chase performance or style.

What am I talking about?  I’m talking about chasing whatever asset class or investment style is currently hot or what was hot last year at the expense of your longer-term asset allocation or longer-term style. Remember investors, equities are long term assets and their expected return profile, the key word there is “expected”, in any given year, while statistically is positive around +9% annually, it is also wildly variable year to year.

For this video I am going to use three indexes that most investors are familiar with to prove my point.  The first index is the cash S&P500 (“SPX”) which is most people’s proxy for the overall US equity market.  Its market cap weighed with the biggest stocks like Apple and Microsoft weighing most heavily.  The second index is the NASDAQ Composite (“CCMP”) which I will use to represent growth stock investing. This index is comprised largely of faster growing large cap technology stocks paying little to no dividends whose terminal value is years if not decades in the future.  This index is also weighted by market cap.  To represent value stocks and the value style of investing that favors dividends or slower more stable growth, I am using the Dow Jones industrials index which is only 30 stocks but is price weighted. This index ticker is usually “INDU”.

Here’s a comparison of the price return, total return, and annualized return of each of these indexes since the end of the Great Financial Crisis in 2^nd quarter of 2009.

14 years of returns, and what you would expect under a lower interest rate environment like what we mainly had.  The biggest returns on an annual basis from the Nasdaq composite and growth stocks, compounding at over 17% per year.  The overall S&P500 compounded at a much higher than normal return of over 14.5% per year and the more value biased, and less volatile Dow Jones Index also compounding at over 13.5% for 14 years.  All indexes with huge and historically “excess” returns versus the long term expected return of 9-10%.

So lets shrink this holding period to the returns since the Covid lows in the early 2^nd quarter of 2020. So now we are only looking at the last 3 years.  Here those returns are.

The ranking of total return of the 3 indexes remains the same as the longer, 14-year time horizon since the GFC bottom, however one can see that the magnitude of the difference between the 3 indexes has shrunk considerably.  In fact, over this holding period, the higher growth Nasdaq index, whose stocks pay little in the way of cash dividends, has barely edged out the passive S&P500 index and its cash dividend in total return.  Even the slow growth higher dividend paying Dow Jones average has returned over 18.5% CAGR off the covid lows.

I’m going to further breakdown the last three years to show you how chasing style as an investor can get you in loads of trouble.  So, we all remember the 2h2020 and 2021 when technology stocks and speculative assets like crypto and SPACs were in vogue?  If you chased those asset classes and invested in them at year end 2021 or early 2022 what happened?  Here’s the outcome since then.

The worst 18-month overall performance has come from?  More highly volatile technology stocks, down -16%, followed by the S&P500 index, down -8.5% still point to point including the dividends.  Even though the Dow Jones Index is still down point to point since year end 2021, your road to almost flat has been less volatile as the dividends you received along the way kept your investment more stable.  Although dividend and value stocks were generally in the red in 2022 overall, they did outperform the SP500 by 3x and the Nasdaq Composite by 5x in 2022.  Here’s that data.

Seeing that, maybe at the end of 2022 you decided to “reallocate” out of one style of equities into another.  Out of aggressive growers, into “less volatile, slower growth dividend stocks, because of their more stable 2022 returns, and the non-stop media stories about a looming recession in the 1h23 or the coming debt ceiling. You decided to alter your longer-term asset mix within your equity bucket. Sell growth and buy value. So, how’s that looking in 2023?  Pretty poor year to date. Here are those returns.

The technology heavy Nasdaq is back to crushing the overall S&P500 short term, while the slower growth Dow Jones index is bringing up the rear year to date while still paying you a yield near 3%.  However, over the last 1-, 2-, and 3-year periods; point to point, through the end of May your total return in each of these indexes and equity styles was essentially the same.

The moral of this story. The wrong way to invest? When greed kicks in and you are thinking about changing the horses’ mid race for the faster looking horse, take a deep breath and think again.  Likewise, when fear kicks in, when the markets are turbulent and choppy, 1- don’t quit the race and 2 – don’t get off your existing horse in search of a calmer ride mid race.  That’s almost always the wrong long-term decision to make.

Flip flopping between goals and objectives, for example, “I need more growth in my portfolio, or I need more income” is not the way equity markets work.  There are no guarantees in the markets except that the exact path forward is always uncertain and making asset allocation decisions in your portfolio, be it stock and bond mix or equity style changes are best made when markets are calm, and emotions are running low. Making emotional decisions when markets are volatile and we are feeling highs and lows as an investor, is the wrong way to invest in my book.

At Oak Harvest, we have many tools that our advisors use to help our clients meet their retirement goals and objectives. These tools are both market based and insurance based, that we can use to meet your retirement goals. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 or click here and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.