Mid-Year Market Outlook: Habits of Extraordinary Investors
It has been a while since you’ve heard from us and maybe that’s a good thing. From an investment standpoint, 2023 has been relatively quiet (despite the debt ceiling ‘crisis’). Global stocks are up 16% so far, shocking Wall Street strategists, most of whom predicted losses this year[1]. This reminds us that trying to time the market is not a healthy habit…but more on that in a minute.
Despite the upswing, most of this year’s gains can be attributed to a handful of large technology stocks, including some which you own in your Longwave portfolio. The success of this group of stocks has partially been driven by surging interest in artificial intelligence. Just like the internet exploded onto the scene in the 90’s and changed everything, some experts believe AI has the potential to be just as revolutionary in the coming decade. If you’re curious about this technology and how it might affect your life, I suggest checking out this article from American University.
Despite the relative calm, things have been energetic for Longwave. Thanks to you, we’ve had the opportunity to meet lots of new people, hear about their needs and share our story. While our investment philosophy is resonating with people hearing it for the first time, we realized that long-term clients like you might need a refresher!
Market volatility and FOMO (fear of missing out) can test and tempt us from our well-trodden path. That’s why understanding our process is so important for our relationship and your long-term financial success. Our investment process is based on the habits of extraordinary investors of the past: Eugene Fama, who proposed that markets are efficient and came to be known as the Father of Modern Finance, Harry Markowitz who showed that diversification can help reduce risk in a portfolio, John Bogle who popularized low-cost index investing and Warren Buffet who demonstrated success in value-based investing over a 70-year career.
Longwave Fundamental Principals
PASSIVE INVESTING: Longwave believes that markets aggregate the best ideas of all participants and are therefore efficient over the long term. Rather than trying to guess which stocks might outperform, we choose funds that passively invest as broadly as possible. “Active” investment managers, on the other hand, believe that short-term inefficiencies can be captured and use timing and stock picking to try to beat the market. Unfortunately, their high fees, combined with a tax drag from constant trading, almost ensures underperformance. Indeed, this chart shows that 90% of stock fund managers fail to beat their benchmarks. At Longwave, we provide stock exposure using low-cost passive funds.
DIVERSIFICATION: Each year, some investment categories outperform, and others underperform. Last year, for instance, commodities did the best, and technology did the worst. This year it is reversed. To create a less volatile investment experience, we pursue an efficient allocation amongst all available asset classes including stocks, bonds, and real estate. Furthermore, rather than tracking just the S&P500 (the 500 or so largest companies in the US), we track the MSCI All-Country World Index (ACWI) to include international opportunities. We do this because a well-constructed asset allocation could increase your investment returns over time relative to your risk tolerance.
FACTOR INVESTING: Research by Eugene Fama and Ken French identified several persistent areas of out-performance in the markets: Small Company stocks, Value stocks, and more profitable companies. Based on this research, we apply slight tilts to our portfolios to try to capture some of these long-term trends. [2]
REBALANCING & MAINTAINANCE: Leave a ship adrift on the ocean and it will not travel in a straight line. Steering and course correction are necessary. Our in-house investment team, led by Director of Investment Research Brandon Wester, is responsible for monitoring the economy, individual funds in your portfolio and identifying new opportunities.
Sometimes, one area of your portfolio will outperform. It’s our job to re-balance back to the original allocation to stay within your risk budget, while also selling investments that have done well (selling high) and purchasing investments that are lagging (buying low). Additionally, during times of volatility, we “harvest losses” which can then be used to offset gains. We consider capturing tax-efficiency as low hanging fruit for increasing after-tax returns over time.
STICKING WITH GOOD HABITS: In 1977, Billy Joel sang “the sinners have much more fun”. While maintaining good investment habits is not as exhilarating as spinning the roulette wheel in Las Vegas, when it comes to investing “Only the Good Die Young” is not a helpful slogan.
In 2008, John Paulson bet much of his client’s money on the housing market collapse and made billions. Since then, his performance has been disappointing. Occasionally, accidentally, bad habits do not end badly but that is not a reliable strategy that we can build financial futures on. At Longwave, our process is equivalent to eating vegetables and exercising regularly. It’s no guarantee but surely helps the odds.
WHAT'S NEXT: As we look towards the 2nd half of the year and back to school time, it remains difficult to predict what happens next for the economy given the conflicting signals we are getting:
We also wonder if stock market strength will spread to other sectors, not just tech. Luckily, given our investment philosophy and current positioning, we don’t have to guess. As we saw last year, our value-driven positioning provides some protection against the downside, while our passive stock exposure helps capture much of the market upside. In both instances, we are lessening volatility.
Looking ahead, we continue to trust the pioneers that showed us how to stay financially healthy and appreciate the trust you’ve placed in us.
Enjoy the rest of your summer!
