Dear fellow investors,
In a recent The Wall Street Journal article, Jason Zweig correctly pointed out that 85% of active stock-picking funds and ETFs had underperformed their benchmark. In many ways, his thesis could be called “The Death of Stock Picking!” Since Jason and most of the financial community have built their investments around owning the S&P 500 Index at the core of their portfolio, investors have feasted on record-setting returns since the stock market bottomed in 2009. Fortunately for stock owners like us, dogs chase cars and people chase stocks! Jack Bogle is taking a victory lap in heaven for the success of his investment strategy.
This got me thinking about a time in the U.S. that appears to be the antithesis of today. It was August of 1979, and the cover story of BusinessWeek magazine was, “The Death of Equities.”
Here is how the article explained the late 1979 circumstances:
“At least 7 million shareholders have defected from the stock market since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks—and bonds—into other investments. If the institutions, who control the bulk of the nation’s wealth, now withdraw billions from both the stock and bond markets, the implications for the U.S. economy could not be worse.”
This brings us to today. Household ownership of common stocks has grown from 15.6% in 1982 of Federal Reserve Board Z-1 Household Assets to 47% today. As you can see below, 58% of all families own common stocks and that is up from 32% in 1989.
Referring back to 1979, the groundwork was laid for that depressing stock market environment by the era from 1941 to 1968. The enthusiasm for common stocks peaked in 1968 at the end of the year in an aggressive stock market referred to as “The Go-Go 1960s.” T. Rowe Price and Warren Buffett both prepared for a more difficult environment in their writing and their actions.
Stock pickers have relatively lower returns because they have their expense ratio to cover. Therefore, it was unlikely that a majority of them would beat the stock market in normal times. However, when a narrow group of stocks dominated returns like they did in 1971-1972, 1998-2000 and in the last ten years, it is surprising anyone did! In recent history, the F.A.N.G. stocks and, more recently, the Magnificent 7 stocks overwhelmed the S&P 500 Index.
If you add Google, Facebook, Amazon, Tesla and Netflix back into the information technology sector of the S&P 500 Index, tech equals 45% of the index. To put that into perspective, the energy sector was 29.74% of the S&P 500 Index in 1981 and was the only major sector that had made money in the prior ten years. Energy is 3.51% of the S&P 500 Index today.
When the bloom comes off the glamour tech stock rose, the S&P 500 Index could become a bit of a death camp for capital. The momentum in this current euphoria episode could become momentum headed in the wrong direction. At that point, we will find out if there are worthy stock pickers. Fear stock market failure.
Warm regards,
William Smead
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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