Navexa Blog

June 3, 2024

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The heavy implications of Nvidia’s
AI-fuelled market domination

Dear Reader,

Every year, ARK Invest publishes its Big Ideas research report.

You won’t be surprised to know what leads 2024’s edition.

Perhaps wary of AI fatigue, they characterize their main big idea as ‘Technological Convergence‘, explaining that:

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‘Catalyzed by breakthroughs in artificial intelligence, the global equity market value associated with disruptive innovation could increase from 16% of the total to more than 60% by 2030. As a result, the annualized equity return associated with disruptive innovation could exceed 40% during the next seven years, increasing its market capitalization from ~$19 trillion today to roughly $220 trillion by 2030.’

Disruptively innovative stocks — ARK’s specialty — could explode in value by more than 1,000%.

In other words, the AI revolution might still be in its infancy.

A thousand percent boom, after these past two years? Come on.

That prediction, of course, presumes the AI story continues to go from strength to strength.

Which means…

This time has to be different?

If you hadn’t heard, Nvidia is now the eighth biggest country in the world.

The chipmaker’s market capitalization at the time of writing is $2.62 trillion.

That’s more than every country bar France, the U.K., India, Japan, Germany, China and the U.S.A.

In other words, the AI powered ‘disruptive innovation’ ARK refers to has catapulted a single listed company among the top 10 wealthiest nations.

Last month, Nvidia’s share price made another new all-time high on the back of its latest blockbuster earnings announcement.

Ever since Open AI’s ChatGPT launch vaulted the promise of this technology into the mainstream consciousness, Nvidia, and as you can see in the chart below, the broader semiconductor market, has been on a relentless tear higher.

‘Catalyzed by breakthroughs…’

​Source​

But that brings us to the topic — or perhaps its more of a question — of this week’s email.

Is it really possible that the AI story has only just begun?

That Nvidia and other ‘disruptive innovation’ companies can continue to break earnings and valuation records for quarters and years to come?

Or is this simply the latest version of the stock market and economy’s favourite cynical quip; This time, it’s different.

Take a look at this:

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​Source​

This shows you 100 years of stock market concentration — the extent to which the market’s biggest companies make up the its total valuation.

​The Kobeissi Letter explains the chart:

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According to Goldman Sachs, the market cap of the largest stock is now 750 TIMES the market cap of a 75th percentile stock.
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To put this in perspective, even at the peak of the 2000 Dot-com bubble the metric only hit 550x.
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We officially have a higher stock concentration than the peak of the Great Depression in 1932. The top 10% of stocks in the US now reflect ~75% of the entire market.
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Big tech IS the stock market.

You see the implication. The chart shows that high market concentration roughly lines up with bubbles, crashes and/or geopolitical disturbance.

But if you listen to some of the market’s most respected commentators and analysts, this is not a problem.

ARK’s Big Ideas report makes clear that they think AI will only compound Big Tech’s power to expand valuations from here.

Citi sees Nvidia’s record-breaking performance continuing:

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Goldman Sachs takes it a step further:

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They claim:
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‘While investors usually think of elevated concentration as a sign of downside risk, during the 12 months after past episodes of peak concentration the S&P 500 rallied more often than it declined.’

History never/sometimes/always repeats

This email is not about swinging your opinion or influencing your investment decisions.

We write it merely to give you ideas you might not otherwise discover or consider, because we believe — like Benjamin Franklin — that knowledge pays the best interest.

It’s with this in mind that we close this week’s edition with some knowledge that many living and investing today have perhaps forgotten.

Astounded, distracted and swept up in the novelty, promise and seemingly limitless future that AI represents, we call all-too-easily allow ourselves to think ‘this time it really is different‘.

In September 1929, what’s now known as The Great Crash began on Wall Street. The broader economic crash that followed, of course, was The Great Depression.

Here’s a selection of newspaper headlines from 1929 — before and during The Great Crash:

Wave of Buying Sweeps Over Market as Stocks Swing Upward
Radio Flashes High; General Motors and Steels Soar

— The World, March 15, 1929
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Stocks Soar As Bank Aid Ends Fear of Money Panic

— New York Herald Tribune, March 28, 1929
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Banker Says Boom Will Run Into 1930

— The World, March 30, 1929
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Very Prosperous Year Is Forecast

— The World, December 15, 1929

More headlines and articles here.

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

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Invest in knowledge,

Thom
Editor, The Benchmark
​​
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

May 27, 2024

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The volatility of volatility

Dear Reader,

The CBOE Volatility Index is one of the most interesting market charts you’ll see.

Because it’s an indicator designed with a specific, ambitious goal:

To predict the near-term future of the stock market.

The Volatility Index, or VIX, ‘provides a measure of market volatility on which expectations of further stock market volatility in the near future might be based. The current VIX index value quotes the expected annualized change in the S&P 500 index over the following 30 days, as computed from options-based theory and current options-market data‘.

In other words, the VIX tracks options to determine the stock market’s chances of being volatile (or not) over the coming month.

Here’s an historical example:

The VIX over the past five years

​Chart source​

For reference, values above 20 are considered ‘high’, below 12 considered ‘low’, and in between considered ‘normal’.

The past five years, as you can see, have been highly volatile, no more so than when the pandemic hit in early 2020 and stocks took a dive.

The S&P 500 over the past five years

​Chart source​

You don’t have to look too close to see the relationship between these two charts.

Generally speaking, when volatility is up, stocks are down.

Simple, right?

Not quite.

This Practitioner’s Guide To Reading VIX explains how the relationship between the index and the options market it uses to produce its volatility reading muddies the water:

‘One common misconception is that VIX levels correspond directly to the volatility observed 30 days later — assuming that a VIX level of 25 means an anticipated volatility of 25%, for instance.

‘Instead, because there has typically been an excess of demand from market participants seeking the insurance-like characteristics that options can provide, there has been a discernable “premium” in VIX — otherwise said, VIX today more often than not overstates the level of actual volatility experienced in the next 30 days‘.

The paper finds that the VIX tends to predict S&P 500 volatility at a 4-5% premium.

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VIX’s 2024 ‘red streak’

Volatility is in focus right now.

In fact, the VIX just broke a nine-year-old record:

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Low VIX = higher stock prices, right?

Again, not quite.

Even a casual look at the economy, markets and world events tells you we’re far from stable territory for stocks right now.

There’s multiple, compounding sources of uncertainty: Wars between nations and on inflation, stocks teetering near all-time highs, living costs pressuring investors’ buying power and in many cases suppressing appetite for risk.

So why has the VIX been plunging?

According to The Bank for International Settlements in Switzerland, the low VIX of late is likely the result of investors piling into yield-enhanced exchange traded funds.

What does that mean?

It means a new breed of actively-managed ETFs are using short-term options trading to deliver investors ‘enhanced’ income.

Which means that their appetite for longer-term options has waned.

Which the VIX reads as a decreased chance of market volatility over the coming 30 days.

Moral of the story here? Don’t always take VIX chart at face value. Understand what’s behind the trend lines and apparent correlations on the screen.

And understand that even a market indicator designed to predict volatility, can be volatile in its prediction of the, er, volatility.

Quote of the week

‘My interest is in the future… I am going to spend the rest of my life there.’

— C.F. Kettering

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

And, if one of our awesome subscribers has forwarded it to you…

​Subscribe here for weekly emails with ideas, stories and content about long-term, high-performance investing!

Invest in knowledge,

Thom
Editor, The Benchmark
​​
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

May 21, 2024

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Crypto’s quiet global domination

Dear Reader,

Crypto has long since escaped a quiet corner of the internet, visited only by drug dealers, money launderers and unscrupulous speculators.

Between the original decentralized currency’s arrival in 2009 and today, Bitcoin and the constellation of other blockchains and tokens it has spawned has spread further and deeper into the world than many would have expected.

Today, the crypto industry (if you want to call it that — an interesting debate in itself) and the ‘tradfi’ or ‘legacy’ systems of finance, business and government are more interconnected than they’ve ever been.

For investors — whether pro or anti-crypto — that means many things.

Like, for instance, that it’s more plausible than ever before that one might own, or at least have exposure to, crypto without realizing it.

This edition of The Benchmark reveals the extent to which crypto, for good or ill, is now ensconced in pretty much every branch of the economy.

The stock market’s ‘stealth’ crypto stash

If you own stocks — particularly U.S.-listed tech stocks — there’s a fair chance you’re exposed, albeit indirectly, to crypto.

According to Bitcoin Treasuries data, about 12% of all Bitcoin in circulation belongs to publicly traded companies (and exchange traded funds), private firms, and nation states.
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Some of the NASDAQ’s giant companies hold gargantuan Bitcoin stashes on their balance sheets:

• MicroStrategy Inc (NASDAQ:MSTR): 205,000 BTC.
• Marathon Digital Holdings Inc (NASDAQ:MARA): 16,930 BTC.
• Tesla Inc (NASDAQ:TSLA): 9,720 BTC.
• Hut 8 Corp (NASDAQ:HUT): 9,110 BTC.
• Coinbase Global Inc (NASDAQ:COIN): 9,000 BTC.

A decade ago, the idea that some of the biggest companies in the world would include Bitcoin miners (Hut 8), crypto exchanges (Coinbase), a software and consulting firm that’s transitioning into ‘the world’s first Bitcoin development company‘ (MicroStrategy), and electric car markers whose CEOs can move crypto markets with a single social media post (see Elon Musk’s Dogecoin proclamations), would have seemed unlikely — maybe even unhinged.

Today, this is the new status quo.

Of course, it’s not just individual companies becoming increasingly involved with crypto.

ETFs that invest in the NASDAQ, or U.S. technology, for example, hold shares in these companies. And these companies hold crypto.

So, say a self-proclaimed ‘crypto sceptic’ owns some of these stocks, or a fund with these stocks in it, they’re indirectly investing in an asset they perhaps don’t have conviction in.

These holdings aren’t really ‘stealth’, of course. Statements and filings reveal exactly which companies and funds hold exactly how much crypto. Hence the phrase, do your own research.

Institutional money floodgates open

The crypto/tradfi collision has only accelerated with the U.S. Securities and Exchange Commission’s (SEC) approval for Bitcoin ETFs in January 2024.

In just a few months, these funds have stacked up about 4% of all of the Bitcoin in the world.
​

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Among them, you have massive investment firms like BlackRock, Fidelity, ARK and VanEck.

These firms are gargantuan players in the institutional investing world, capable of influencing vast sums of capital (BlackRock alone is the world’s largest asset manager, with about $10 trillion in funds under management).

In Q1, alone, net $12B flowed into these newly available funds, allowing institutional investors exposure to Bitcoin without having to buy directly.

The Bitcoin ETFs were a long time coming. But it’s not just the money flowing into them that’s bringing the crypto and traditional finance worlds closer together — it’s the precedent they set for further possible fund launches.

Many in the crypto industry are arguing — and lobbying — for Ethereum ETFs next. Some expect these could become a reality within the next 12 months.

Added to the fact you have institutional money (legally) flooding into Bitcoin now, and multiple listed companies holding significant sums and trading on major exchanges, it’s worth noting that governments, too, now hold serious crypto stashes.

The U.S. Government, having started seizing crypto in the course of prosecuting cybercriminals and illegal ‘dark’ markets, currently has about 200,000 Bitcoin tucked away — roughly the same stash as MicroStrategy.

As of 2021, El Salvador has used Bitcoin as legal tender. While not a major player in the world economy, this is of course a significant development in crypto going mainstream.

Which brings us to a central crypto question — one which becomes more and more difficult to answer the more intertwined crypto and fiat currencies become.

The end of the ‘inflation hedge’ story?

A central tenet of cryptocurrency’s promise is the inflation hedge narrative.

With a fixed supply of 21 million, Bitcoin maximalists tout the original crypto as an antidote to rampant inflation — created courtesy of rampant central bank money printing.

This scarcity narrative underpins the argument that Bitcoin could serve as a safeguard against inflation’s progressive erosion of your buying power.

But, with the crypto and traditional markets increasingly colliding and integrating, thanks to the reasons outlined above, this narrative is under threat.

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As more crypto holdings flow into the companies trading on the stock market, and more institutional money flows into crypto courtesy of the newly-launched (with more possibly to come) ETFs, crypto and stocks start might behaving more similarly — which presents problems for those trying to hedge against dollars with crypto.

According to Investopedia:

‘Bitcoin has come a long way from its meagre beginnings as a payment method. Regulatory and classification debates between regulators, fans, and investors continue — but the cryptocurrency keeps demonstrating it is an investment asset, a currency, and a novelty all at the same time.

‘Its price loosely correlates to stock market prices, likely because traders and investors treat it the same way they would any other asset — as a way to store value, protect capital, generate income from small trades, speculate on price actions, and more.

‘The longer it survives in the market, the more investors will use it in their strategies.’

Know what you own (and what they own)

While it’s convenient to think of the stock market and cryptocurrency world as two separate things, the reality is that they’re becoming more intertwined.

One of Peter Lynch’s most memorable quotes is: ‘Know what you own and why you own it‘.

Given the evolution of the crypto/tradfi relationship, investors might want to dig even deeper, to understand what the stocks they invest in hold on their own balance sheets.

And, of course, why.

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

And, if one of our awesome subscribers has forwarded it to you…

​Subscribe here for weekly emails with ideas, stories and content about long-term, high-performance investing!

Invest in knowledge,

Thom
Editor, The Benchmark
​​
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

May 13, 2024

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59 years worth of investing wisdom

Dear Reader,

Warren Buffett has been in the markets longer than many investors have been alive.

In 1965, his Buffett Partnership Ltd. company acquired textile manufacturing firm, Berkshire Hathaway, and assumed its name as it transformed into a diversified holding company.

This diversified holding company is now among the S&P 500’s top 10 listings, and among the largest private employers in the United States. It’s class A shares have the highest public company per-share value on the planet.

Buffett’s investing and business success is objectively impressive.

Rather than throwing lavish parties in luxury mansions, or parading between red carpet events in bespoke supercars or megayachts, Warren keeps his lifestyle modest, preferring to let his investments — and their near six-decades of outperforming the S&P 500 by nearly 10% a year — do the talking.

But, the impressive performance charts and corporate filings aren’t the only way to observe Buffett’s brilliance.

Six decades of shareholder letters

When Buffett took control of Berkshire Hathaway in ’65, he started writing letters to the company’s shareholders.

Initially ‘signed off’ by other figures in the business, Buffett eventually started publishing in his own name, building a (so far) near six-decade body of writing covering a huge range of markets, events and ideas in his now-signature friendly, casual tone.

You can read the 1965 letter (pictured below) here.

​

Wall Street Journal writer, Karen Langley, recently started with the letter above and went all the way — reading every single shareholder letter Warren has ever written.

Here’s six of the best excerpts:

Six of Buffett’s best investing ideas

1: Fear & greed as ‘super-contagious diseases‘ — 1987
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‘Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable.
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‘And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease.
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‘Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

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2: Watch the playing field, not the scoreboard — 1992
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‘It’s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings.
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‘In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.‘

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3: A ‘really long-term example‘ — 2006
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‘It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years.
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‘Between December 31, 1899, and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497…. This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity,‘

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4: The power of price on perspective — 2012
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‘The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.‘

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5: Bubbles, wisdom & folly — 2012
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‘Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices.
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‘In these bubbles, an army of originally skeptical investors succumbed to the ‘proof’ delivered by the market, and the pool of buyers — for a time — expanded sufficiently to keep the bandwagon rolling.
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‘But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: ‘What the wise man does in the beginning, the fool does in the end‘.‘

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6: What to do when the skies rain gold — 2017
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‘Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves.
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Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.
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When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.’

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‘The Architect of Berkshire Hathaway’

That last excerpt refers, of course, to the late Charlie Munger, vice chairman of Berkshire Hathaway, who passed away in 2023.

Buffett referred to Munger as ‘The Architect of Berkshire Hathaway’, and credited him with shaping not just the company, but Buffett’s whole way of viewing business and the markets.

Berkshire Hathaway reported a profit of $96.2 billion for 2023. The company ended the year with a record $167.6 billion in cash, prompting plenty of speculation from commentators on what, if anything, Buffett’s now-colossal firm might do with it.

For context, $167.6 billion is more than enough to buy Nike, Morgan Stanley, Boeing, BlackRock, Airbnb, or Sony, among other huge firms.

Quote of the week

‘In my whole life, I have known no wise people… who didn’t read all the time.
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​‘You’d be amazed at how much Warren reads, at how much I read.
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​‘My children laugh at me. They think I’m a book with a couple of legs sticking out.‘

— Charlie Munger

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

And, if one of our awesome subscribers has forwarded it to you…

​Subscribe here for weekly emails with ideas, stories and content about long-term, high-performance investing!

Invest in knowledge,

Thom
Editor, The Benchmark
​​
​Unsubscribe · Preferences​

All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

May 6, 2024

​

Ray Dalio, debt cycles,
and the economic machine

Dear Reader,

What if you never had to worry about unforeseen financial events again?

What if you had a calendar that showed you what economies and markets were doing years in advance?

How valuable would that knowledge be?

This is what this week’s The Benchmark is about.

About 10 years ago, I stumbled upon Ray Dalio’s How The Economic Machine Works video.

It did for me in 30 minutes what no economics teacher or other ostensibly financially savvy person I’d met had managed:

Explain, in simple terms, what the economy is, how it behaves, and why.

Dalio’s thesis in brief:

Economies go through cycles of expansion and contraction.

The accumulation and deleveraging of debt drives this cycle.

This cycle consists of three main stages:

1. Credit expansion
2. Debt bubble
3. Deleveraging

I’ll explain more after I explain what gives Ray Dalio the authority to explain such a seemingly complex thing as the economy in such simple terms.

Benchmark beater: Ray Dalio

From mowing lawns to raking in billions

Ray Dalio first started making money as a kid mowing lawns in New York.

A 2022 estimate valued his personal wealth at US$15.7 billion.

What happened in between?

Ray got good at understanding money and markets.

In 1974, unhappy with his employer (a trading firm), he got drunk at the Christmas party and punched his boss in the face.

After the firm let him go, some of its top clients chose to continue letting Ray manage their money.

The following year, he started Bridgewater Associates from his two-bedroom apartment.

The firm launched multiple funds in the course of becoming the largest hedge fund firm on the planet.

Some of the biggest entities in the world parked their money with Bridgewater.

This chart gives you an idea why:

Source: Wikipedia​

We all like to marvel at lines that go up and to the right.

But what’s most interesting about this one — the Bridgewater Pure Alpha 1 fund’s performance between 1991 and 2015 — is how it ends up pretty much where the S&P500 does…

Without the massive falls in 2000 and 2008.

While stocks were tumbling amid the two bloodbaths…

Ray Dalio’s investors were making money.

That’s what qualifies this man to lecture the rest of us on what the economy is, how it behaves, and why.

Long-term productivity growth, with the short and long-term debt cycles overlaid.

As you’ll see in the video, there’s three key factors you need to understand:

Productivity Growth: Over time, we become more productive and raise our living standards.

Short-Term Debt Cycle: At the consumer level, our borrowing and deleveraging generally moves in ~6-year cycles.

Long-Term Debt Cycle: At the broader economic level, society’s borrowing and deleveraging generally happens in ~75-year cycles.

According to Ray, both the 1929 ‘Great Depression’ and the 2008 ‘Great Recession’ both marked the beginning of ‘deleveraging’ phases on the long-term debt cycle.

Understanding this fundamental economic truth was what allowed Bridgewater’s Pure Alpha 1 to effectively dodge the 2008 crash.

If the market is really this easy
to predict, where are we now?

Ray Dalio is not only one of the wealthiest people on the planet, financially speaking.

He’s also — I would argue — one of the wealthiest in terms of his knowledge and understanding of the financial world.

(And, as we like to remind you in The Benchmark, knowledge pays the best interest.)

Ray is about as on the money as one can get about the fundamental nature of the economic world we live in.

Here are some comments he made in 2023:
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‘In my opinion the tightening that began in March 2022 ended the last paradigm in which central banks gave away money and credit essentially for free, which was great for the borrower-debtors.
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‘We are now in a new paradigm in which central banks will strive to achieve balance, in which real interest rates will be high enough and money and credit will be tight enough to satisfy lender-creditors without interest rates being too high and money and credit being too tight for borrower-debtors.’

Dalio: 2024 a ‘pivotal year’

Ray’s January Principled Perspectives newsletter is a deep dive (an actual deep dive, not just another blog or email claiming to be) into how he sees these economic cycles playing out in the world.

It’s well worth a read, if you have the time and intellectual energy to absorb some very big ideas.

Here’s why:
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‘2024 will almost certainly be a pivotal year in a number of ways— for example, we will find out whether the existing democratic order in the US will or won’t hold up well, and whether or not the world’s international conflicts will be contained.
​
‘Of course, like all years, 2024 and the events in it will be just small parts of the long string of years and events that make the Big Cycle arc of history, which is what is most important to pay attention to.’

If you’ve still not checked it out, watch How The Economic Machine Works now.

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

And, if one of our awesome subscribers has forwarded it to you…

​Subscribe here for weekly emails with ideas, stories and content about long-term, high-performance investing!

Invest in knowledge,

Thom
Editor, The Benchmark
​​
​Unsubscribe · Preferences​

All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

April 29, 2024

​

Risk 🔗 Reward

Dear Reader,

‘Investors are beginning 2024 at a precarious point.’

So begins Morgan Stanley’s 2024 U.S. Stock Market Outlook.

The carefully-worded report lays out three main reasons why investors need to approach the market cautiously this year:

1. U.S. stocks ended 2023 ‘overvalued’.
2. Overly-optimistic earnings forecasts & tapering economic growth.
3. Markets overestimating Fed rate cut agenda.

How, exactly, does Morgan Stanley recommend readers of its sage wisdom act on these bleak observations?

‘Balance expectations and portfolios by buying the equal-weighted S&P 500 Index or actively favoring value-style stocks, with a focus on financials, industrials, utilities, consumer staples and healthcare.’

Basically, buy the market, or buy a bunch of stocks from those five sectors.

In this email, we’re going to do two things:

First, let’s check in to see how markets are tracking since setting off from Morgan Stanley’s ‘precarious point’ on January 1.

Second, we’ll show you a few pieces of information that help long-term investors avoid getting caught up, bogged down, or bothered by reports such as that outlined above.

Stocks in 2024: The story so far

So far, four months into 2024, Morgan Stanley’s predictions of ‘an average year for markets’ appear to be wide of the mark.

The S&P 500: Up 7.5%

Source: Google Finance

NASDAQ 100: Up 7.8%

Source: Google Finance

Of course, these performance charts in no way tell us what might come next for the S&P 500 and the NASDAQ.

But, consider this:

Going down while going up (and vice versa)

Ben Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management (who manage about $2.5 billion of client capital).

Ben wrote a fantastic post last year titled Even When the Stock Market Goes Up it Still Goes Down.

In his post, he makes the case that investing is pretty much always confusing in the short term.

Even when stocks are trending higher, they can and do crash lower, or ‘draw down’.

Equally, when stocks are trending down, they can produce short-term price increases.

Ben also notes that since 1928, the S&P 500 has gained 20% or more in a year 34 times.

That’s 35% of the years up to and including 2023.

Of those 34 years, the index has corrected by 10% or or more in 16 of them.

In other words, nearly half the S&P 500’s strongest annual performances include a double-digit correction/drawdown.

Here’s the proof:

​

In Ben’s words:
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‘Risk and reward are attached at the hip when it comes to investing. One of the reasons the stock market provides such lovely returns in the long-run is because it can be so darn confusing in the short-run.
​
‘You don’t get the gains without living through the losses.’

We’ve written before in The Benchmark about so-called ‘dangerous short-termism‘ — the phenomenon that makes people, and investors, struggle to see beyond events and concerns that are immediately in front of them.

What Ben Carlson writes about living through the losses to get the gains, this next chart illustrates (over the much longer term).

Here’s the Dow Jones Industrial Average from 1915 to March, 2024:

​https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart​

As you can see, the index’s 2,217% return over the more than 100 years has not come without multiple massive crashes and downtrends.

The Great Depression crash and the protracted bear market in the 1970s stand out as the most dramatic drawdowns.

If you’re a newer investor, and you’re yet to develop the long-term view common to history’s most successful and wealthy investors, annual market forecasts like Morgan Stanley’s might scare you.

But as Ben Carlson shows, billionaire Kenneth Fisher’s statement that ‘time in the market beats timing the market‘ is a good general approach to the stock market.

Before we hammer on the point too much (although I’d argue it’s always worth considering such proof and observations, especially when dealing with difficult ‘drawdown’ episodes along the way), here’s one last visual for your consideration:

This one’s from Long Term Mindset writer Brian Feroldi:

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Decades > Years > Months > Days

Morgan Stanley and other Wall Street firms can predict, forecast and prognosticate all they want about what the market might or might not do.

But the reality is — for those looking to build wealth in the markets over the long term, at least — that what happens this month, or even this year, is of little relative consequence when you have your sights set on a bigger picture far beyond the short or medium-term horizon.

With ups come downs, and as Ben Carlson says, risk and reward are joined at the hip.

That’s it for this week’s The Benchmark email.

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Thom
Editor, The Benchmark
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