During my first half-decade as a full-time equity portfolio manager, I was basically a stock picker. Gradually I began to think of the target index that it was my job to outperform as a perfectly round sphere of clay that it was my job to reshape, My aim was to make that sphere into something better, not in an aesthetic sense (although I kind of thought of it that way at the time), but to reshape it into a form that would produce a higher return than if I were content to stay with the original spherical shape.

I could do this either by pulling a big chunk out or pushing a big section in (overweighting, underweighting an industry/sector) or pulling/pushing a small section (an individual stock). I could distort the shape a lot with a given move, or a little. I considered, and still do, the sum of all these distortions as a measure of the risk I was building into the portfolio.

The two polar alternatives would be either to do nothing or to flatten the ball into a pancake. Experience shows that for almost all professionals doing nothing would achieve better results than they would be able to achieve. Hence, the justifiable allure of index funds (which is where the largest part of my own money is).

The pancake, an all-or-nothing concentration on a few names, is something I’ve only seen done by a professional once. And once was enough. At one time I had a deep-value colleague who made a huge bet on Digital Equipment (DEC) for an exceptionally long period during the 1990s. As it turns out, and as the market understood very well, DEC products were an intermediate stage between the IBM mainframe and the personal computer. DEC was left in the dust behind Microsoft, Compaq Apple and the IBM PC, starting in the late 1980s. As the stock went down, my former colleague, a deep value investor with a strong belief in the power of book value, bought more. This ended up destroying his career.

As for me, I try to separate the ideas I think will work into two categories, basically either sector/industry or individual stock.

Sector/industry

2024 S&P performance by sector

This is a copy of the list I posted a couple of days ago.

YTD S&P 500 sector performance

Financials +36.0%

Communication services +34.2%

IT +34.2%

Utilities +30.1%

NASDAQ +28.2%

S&P 500 +26.5%

Consumer discretionary +26.2%

Industrials +25.8%

Russell 2000 +20.1%

Staples +18.2%

Energy +13.1%

Real estate +12.0%

Materials +10.2%

Healthcare +7.8%.

So far this year, only four of the 11 sectors have been outperformers. Being heavily involved in the sectors at the bottom of the list, e.g., Healthcare or Materials, has been like rolling a giant snowball uphill.

2025?

One of the big questions for next year is whether the outperformers from this year continue to power ahead or whether the laggards will catch up. My guess right now is more the former than the latter.

Another consideration is that the bottom six are all in relatively mature economic areas. This implies that valuation will likely be an important consideration in their performance. Healthcare is an area I don’t know much about. My guess, though, is that there are interesting names for investors using value metrics, enough for me to want to poke around.

Materials, on the other hand, does well if world economies are booming. That’s a real question mark until we see how much Trump follows through on his campaign rhetoric, which is a recipe for recession.

We may well be at peak world crude oil usage. If so, the Trump “drill, baby, drill” philosophy is likely to depress prices more sharply than would otherwise be the case. Will OPEC be able to control overall output?

I think Utilities will continue to be a good place to be, as will Consumer discretionary. Tech, too, although it’s likely that the leading names will be different from this year’s winners. The issue with the consumer is linked to Trump, too. Typically, as recovery matures consumers who have traded down begin to move back to the higher-priced vendors they abandoned during bad times. As can be seen from Trump’s soybean tariffs from his last term, his program will likely depress economic growth.