2024 in Review: Great Year but Not Easy
Dear Clients
When I look back on 2024, my first thought is that it was a fantastic year for markets and portfolios. But in many ways, it doesn’t feel as though it was easy. I mean, it’s never easy. Investing is not easy. Life is not easy! I know for many, last year was hard, both on a personal front and a financial front. Some of you have battled sickness, or lost people you love. Too many people left us last year.
The way we measure our financial success is whether our net worth is growing consistently over time and whether we are moving closer to our goals. This year, both of those things should be true. The S&P 500 was up 25% over the year, and for all clients, the S&P 500 is your biggest holding. The rest of the world didn’t keep up, once again, but still showed positive returns.
I always use the word ‘goals’ loosely. Whilst I am not one to set goals for the year ahead, I do think the start of the year is a time to be introspective and reflective; reflective of who you are, what you want and how you can move closer to living a life of which you will be proud.
Because remember, your money is there, not to make more money and for you to die, leaving more money behind than you have ever had; it’s there to help you live a life that lights you up. My job, more than anything, is to keep nudging you in the right direction. It’s to keep you moving towards your best life. It’s so easy for us to get pulled off course. We look to what others are doing and take our cue from them. That can lead us down the wrong path, quickly.
The start of the year is a good time to go back to our investing first-principles and to remind ourselves how easy it is to let human nature into the driving seat. Human nature; always a failed investor.
There are two points in the investing cycle when we are most susceptible to human nature. The first is in the last legs of a bear market, when we are hurtling towards an epic bottom. At that point, the world is ending (except it never does). The echoes of ‘this time it’s different’ are everywhere.
At the bottom, the values of the great companies of the world have separated from the price of the stocks. The two things have gone off in different directions. When prices are declining, values are increasing. Put another way, when stock prices are going down, the enduring values of companies are going up. Of course, that’s the opposite of what everyone thinks is going on because human nature, that failed investor, has taken the driving seat.
Here’s when we see the difference between companies and stocks. We own companies. We are shareholders. The stock market on the other hand is where we see the price of those companies - not value, but price. The stock market is where all the craziest people in the world go to do all the craziest things – it’s the lunatic asylum!
This point of maximum pessimism, where price and value have separated, is when many investors get taken out. Not us!
The second point in the investing cycle when we are in most danger of human nature taking over is right about now.
Let me explain.
Over the past 14 years, the mega-cap stocks in the US have outperformed everything else. Charlie Bilello describes how this has been accelerated in the last two years. He writes, ‘over the past two years, we’ve seen tremendous outperformance from these seven names relative to the S&P 500 and S&P 500 equal weight. This has boosted their importance in the index with over a third of the S&P 500 now concentrated in the “Magnificent Seven” stocks, up from a fifth of the index two years ago. This is the largest share for any 7 companies in the index on record.’
The S&P 500 has never been this concentrated.
This chart shows the wild outperformance of the Magnificent 7 over the past two years
This is only one of the extremes we are seeing in markets currently.
Not only has the S&P 500 never been this concentrated, it has never been this expensive in relation to the rest of the world.
Charlie Bilello points out that US stocks outperformed international stocks by nearly 20% in 2024, the biggest outperformance we have seen since 1997. The result, he writes: ‘we’re now more than 3 standard deviations above the mean in terms of historical US outperformance’.
This is a fancy way of saying, wow, this has never happened before.
We can never know what will happen next in markets, but one thing we do know is that markets move in cycles. You can see from the chart below that the US does not have the monopoly on returns. When does it turn? I don’t know, but we are closer to the turning point than we were this time last year.
Why is this dangerous, you ask? Well, you know what human nature wants to do? Human nature wants to abandon the concept of diversification and it just wants to own more of the thing that has gone through the roof. Human nature’s default investment strategy is to buy whatever has gone up the most in the most recent block of time. And of course, at the same time, it wants to sell whatever has performed most poorly over the same block of time so that we can buy more of whatever has gone up the most.
This has a name. It’s called performance chasing. As a client, you signed an agreement to never do one of two things; market-time or performance chase.
There’s a reason why we don’t performance chase. It’s a terrible investment strategy. Nick Murray writes, virtually no portfolio strategy more reliably produces worse returns than performance-chasing. Warren Buffet explained performance chasing in one sentence; the investor of today does not profit from yesterday’s growth.
Again, the investor of today does not profit from yesterday’s growth.
At 6,000 today the S&P is almost 10 times its lowest point in March 2009. But the investor who buys in today gets none of that!
And none of this is to say that I am bearish on US equities. I am long-term bullish, as I have been since the start of this newsletter and will continue to be until the world actually does end. The US has the fastest growing and most innovative companies in the world. We definitely want to own them. We always want to own them. Today is a great day to buy them.
But not just them. Owning businesses in only one country introduces idiosyncratic risk into a portfolio. Diversification removes that risk.
Diversification is the way that we manifest our humility, that is, it’s how we encapsulate the acknowledgment that, although we have a very good idea what’s going to happen in the long run, we have no idea what’s going to happen next. No one does.
Diversification is the antidote to overconfidence. And overconfidence kills.
Remember, good investing is always counter-intuitive. The thing you most want to do is normally the complete opposite of the thing you should do.
Stick to the plan, stick to the time-tested principles. Don’t chase performance and don’t market time.
Our General Principles.
Here’s a reminder of our general principles.
We are long-term, goal-focused, plan-driven investors. We acknowledge that a portfolio funds a plan.
Our core investment philosophy is to invest in broadly diversified portfolios of high quality businesses. We invest for a reason.
We believe that the economy can’t be consistently forecast, nor the markets consistently timed. In fact, we know this to be true.
From this knowledge we understand that the only practical way to capture the premium long-term return of equities is to ride out their frequent, sometimes significant but historically always temporary declines. Frequent, sometimes significant, but always temporary. Remember, the market goes down, but it never stays down.
We do not react to economic or market events. We see volatility as our friend not our foe. We stay disciplined and patient.
I say this over and over, but it’s simple, not easy.
Human nature, when left to its own devices, will always find a way to do exactly the wrong thing at exactly the wrong time. That’s why we are here, by your side, guiding you and nudging you, gently but confidently, towards the future and the life that you really want to live.
Whilst the world around us wobbles, we will never waver in our mission.
Thank you for being our client. It is our honor to be in your life.