Looking around the developed world: the UK is a train wreck, China continues to dismantle the economic juggernaut a prior generation built, the EU is old–and showing its age (although southern Europe, of all places, seems to be prospering). The US has reelected as president the reality show host who didn’t exactly cover himself in glory in dealing with the covid crisis during his first term and for whom the country’s GDP growth doesn’t seem to be a very high priority. Put a different way, despite the key role of tariffs played in creating the Great Depression of the 1930s, he believes they’re the path to prosperity today.
All in all, not a lot of reason to think we’re entering a period of rapid economic expansion.
In addition, we’ve had a very strong post-Covid two years+ of stock market performance, with the S&P up by 68% from its late 2022 lows and NASDAQ coming close to doubling over the same span. So one might argue from this alone that we’re due for a pause. The counterargument, and there is almost always a counterargument, is that the Trump administration will organize another cut in the corporate tax rate. A similar corporate tax cut during his first term gave stocks a significant boost–even though it also weakened the government’s long-term financial position.
What to do …or rather, what I’m doing. To be clear, this is not general financial planning. This is about how I’m managing the active part of my equity portfolio, which makes up about a third of the money my wife and I have in the stock market.
Generally speaking, I think the key to success with stocks is knowing a lot about a small number of positions that you hold rather than to have the portfolio express half-baked opinions about a whole bunch of stuff. To my mind, “knowing a lot” means knowing more than the average market participant knows–hopefully much more, even though the reality is that this is a high bar. The market is sneaky smart and most often knows more than we give it credit for.
As a professional growth stock investor, I typically had a portfolio of about fifty names. Invariably, though, my outperformance would come from two or three stocks. Nowadays, as a private investor, I have about a dozen. All the performance still seems to come from one or two positions, though. So I have two main tasks–watching the outperformers super-carefully and making sure the also-rans don’t punch a hole in the bottom of the boat.
Seasons count, too. Growth investors tend to do best in up markets. Value investors tend to shine in flattish or declining markets. My impression is that the current administration in Washington has a social agenda that’s significantly anti-growth. So thinking defense is becoming the order of the day.
More tomorrow