A huge distraction to the investment business

Three random thoughts on the current state of the stock market:

(1) The top 10 stocks are smoked. One of the prevailing theories during this past bull market was that the biggest stocks had the S&P 500.

The top 10 stocks now make up more than 30% of the index by market capitalization, so it would make sense for this group to have an outsized impact on market performance.

To take this a step further, it would make sense after these stocks crash to look below the stock market. If the largest stocks were holding up the stock market, the logical conclusion would be that their fall would spell doom for the S&P 500 if and when they did.

The current market is putting that theory to the test.

These were the 10 best stocks in the S&P 500 as of September 2021, and their current performance from peak to trough:

(1) Apple -15.3%
(2) Microsoft -24.1%
(3) Google -28.1%
(4) Amazon -34.4%
(5) Facebook -55.7%
(6) Tesla -33.6%
(7) Berkshire -20.6%
(8) Nvidia -48.1%
(9) Visa -14.8%
(10) JP Morgan -33.2%

The average decline of the top 10 stocks since last fall is down 30.1%. That compares quite unfavorably to the S&P 500’s decline of -17.4%.

In fact, there are only two stocks with absorption that beats the S&P 500 — Apple and Visa. Eight of the top 10 are down more than the market itself. Many of these stocks fell significantly.

I have to be honest – this result is quite surprising to me. I would have guessed that the stock market would be down a lot more than it actually is if you told me that the top 10 stocks in the index last year were down that much.

How is it possible that the biggest, sexiest tech names are getting hammered, but the S&P 500 is outperforming most of them by a wide margin?

This year’s performance shows that it’s not always just the biggest or sexiest stocks that matter when it comes to performance.

Sometimes it’s the boring stocks that save the day.

Sectors that have outperformed this year so far are Utilities (-1.5%), Consumer Staples (-3.9%), Energy (+30.9%), Industrials (-13.8%) , finance (-15.4%), materials (-16.3%) %) and healthcare (-7.2%).

Yes, the tech sector has struggled this year, but tech stocks don’t make up the entire stock market.

It’s hard to believe that the stock market isn’t going down more than it is right now.

(2) The speed of stock market movements is a huge distraction. I love watching the stock market, but the short-term moves we’ve seen can give you a headache if you’re not careful.

Since just before the start of the pandemic (January 2020), the S&P 500 has risen almost 28% in total with dividends included.

On an annualized basis, that’s a return of 10% per year. So the last 19 months have given investors in US stocks the long-term average annual returns you see in the history books.

Not bad, right?

Just think of everything we’ve been through during that time — the pandemic, lockdowns, negative oil prices, supply chain disruptions, 40-year high inflation, and dozens of other crazy macro, geopolitical, and market things.

This 28% total return includes the following moves:

  • 34% absorption from February to March 2020, which was the fastest bear market over 30% from an all-time high in history.
  • A 120% gain from those March 2020 lows on the first day of trading this year in one of the wilder highs we’ve seen in recent history.
  • And now an absorption that has reached almost 24% at its worst point.

That’s two bear markets and a massive bull market in less than 3 years!

That 10% annualized return for nearly 3 years looks good if you’ve been living in a cave and managed to ignore the stock market.

I’m not suggesting you live in a cave. This seems a bit drastic as a form of behavioral alpha.

But I remember the wonderful quote from the late John Bogle when he said, “The stock market is a huge distraction for the investing business.”

Headlines are also a huge distraction to the investment business.

If you can avoid paying attention to your own long-term investments, that’s probably a win for most investors.

(3) Sometimes you just have to eat your losses. I had a conversation with an investor this week who asked the following:

So I have a reasonable asset allocation that suits me long term. I don’t take crazy risks and I don’t speculate with much of my portfolio. I save enough money to feel like I can reach my financial goals. What else can I do to deal with stock market losses?

My response went something like this:

Unfortunately not much. As long as you have a sound investment plan as a long-term investor, sometimes you just have to eat your losses. Long-term returns are the only ones that matter, but sometimes that means experiencing low returns in the short term.

I guess you could try to hedge or time the market or completely change your asset allocation to guess what will happen next before a bear market starts.

I’ve just never come across investors who can do this consistently without making a huge mistake at the worst possible time.

Losses are an annoying feature of successful long-term investing, but there’s not much you can do to avoid them if you want to earn decent returns over time.

More information:
To win, you must be willing to lose

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