surviving in a confusing stock market

There’s a certain irony to the fact that while Trump was a terrible disaster for the US economy, having an inept white supremacist as president did make the stock market unusually easy to figure out during his term. And his inability to form a coherent plan of action on anything arguably took some of the edge off his racism. Bet against the US economy/on multinationals, particularly those with little plant and equipment or at least little in the US. During 2020, bet on ultra-low interest rates (the only effective government tool during the pandemic) and on stay-at-home stocks.

Now we’re in the process of cleaning up the mess. I think there’s more going on with the Biden agenda than that, but whatever the causes, we’re in a period of substantial market crosscurrents, without a clear roadmap, at least none that I can see. Some of this is timing, like when interest rates will begin to rise. Some isn’t. That’s about what post-pandemic life will look like and whether we’re safely past our “Reichstag moment.”

What to do?

–the key to stock market success is not to know something about everything. Quite the opposite. It’s about knowing as much as possible more than the consensus about a small number of things that will make up the core of your portfolio. In a time like last year, where just about everything ex the Russell 2000 worked, that’s not so important. But at a time like now, when mistakes the punch a hole in the bottom of the boat are much more likely, it’s crucial.

–look like the index with the rest of the portfolio. This is just another way of putting the previous paragraph. If you hold the S&P 500, you’ll get the S&P 500 return. You make your portfolio look different from the S&P, either by holding stocks not in the S&P or by holding S&P constituents in different proportions from the index, with the idea that these changes will produce better-than-index performance. My preference has always been to make large changes in a small number of areas. Today, having a small number of areas is unusually important, I think, and maybe the “active” (meaning differing from the index) position sizes should be somewhat smaller, as well.

–I don’t think this is a forever thing, but until the economic and market situation is clearer, I think it’s better to deepen our knowledge of a few positions we need to get right rather than maintain a superficial awareness of a lot of names.


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