In a somewhat cautionary example, I had an associate over at Tectonic Advisors do a search on his Bloomberg for me, analyzing the stocks in the Russell 2000 Index. Just over 30% of those stocks have less than zero earnings – as in, they are losing money. So when somebody passively buys a small-cap index – almost any small-cap index – they are buying a high percentage of companies that have no earnings.
I understand that Amazon and Tesla have no earnings and yet there may be good reasons to buy them. There may be similarly good reasons to buy hundreds of small-cap stocks that have no earnings today, because of expectations of future powerhouse earnings. I am an investor in biotech stocks that have no earnings.
But those are targeted and specific investments, not passive index investments where you get the good and the bad indiscriminately. Yes, active management has had its collective head beaten bloody for the past few years; and the proclivity for passive investing may persist a lot longer than any of us imagine, driving markets higher than many of us believe possible; but I think the stampede into passive investment is going to end up painfully, at the bottom of a cliff, for many investors.
I want to make it clear that I am not suggesting you get out of the stock market. In my own money management program, which is based on diversifying among trading strategies rather than asset classes, the managers I am using all have systems that are telling them to be quite bullish on equities right now.
I am sure that Steve and I could have written a similar letter in early 1999 (if the data had existed) that would have been as cautionary as today’s letter is. And yet, the correct short-term and medium-term position to be in throughout 1999 was long equities. So yes, my call for the beginning of a secular bear market in 1999 was early. It was the correct long-term position, but it was painful to sit on the sidelines. Ditto the experience I had in 2007, when I said we would be having a recession and the markets would go down, which they did – but only after they went up 20% from the date of that call.
I didn’t have to be spanked more than a few times before I learned that trying to talk logic regarding the market – or at least logic as I understand it – is not a useful investment or trading style. Having a rigorous, systematic approach is far better. I’m putting the final touches on a series of white papers on how to invest that we will be releasing to you quite shortly, after the Easter weekend. They are the culmination of years of research and a lot of work on the part of our team of serious investment professionals, and I’m sure you will find them interesting.
Augusta GA, the Masters, and Tampa Bay
I find myself looking out over the Savannah River in Augusta, Georgia. I ended up having to come to Augusta earlier than I had planned due to bad weather and numerous flight cancellations, skipping Atlanta. Augusta is quite the lovely town, and looking out over the river into South Carolina is very relaxing. As you might imagine, my focus this weekend is on the Masters golf tournament, where I am spending the weekend as the guest of good friends. It has been stressed to me that I’m not allowed to bring any digital devices onto the course or into the club, so for the first time in a very long time, other than on very long plane rides over the pond, I will be without connection. Then again, out on that splendid course, one of God’s own very special places, I am sure that my life will be enriched by not having anything in my hands other than a drink and/or a pimento cheese sandwich, which friends tell me is something that you must at least sample.
Monday I head down to Tampa Bay to meet up with Patrick Cox and a few friends to do a deep dive into some of the latest developments in the revolution that is happening in antiaging medicine. And revolution is the precisely correct term. I am utterly amazed at the discoveries being made.
Sometime later next week I’m going to get together with George Friedman for a Skype interview, when we’ll go over some of the presentations and discussion at his Geopolitical Futures conference last week in Washington DC. It was a most thought-provoking event, and I do have a few questions that require further consideration. I will send you a link when that gets done.