One of the indications of a late-stage bull market is that returns are concentrated in just a handful of stocks.
Hello. My name is Paul Carroll. I’m the CEO and founder of Efficient Wealth Management, a boutique wealth management firm here in South Texas.
So right now, everybody’s talking about the FAANGS—Facebook, Apple, Amazon, Netflix and Google. That’s where all the returns are. In fact, without the FAANGS, the S&P really has no teeth. We’re seeing, outside of that small handful of companies, really flat markets since late last year. On the bond side of course, we’re having to go short. What that means in English is only the short maturities are safe. Because if those interest rates do continue to rise, then the principal value of the bonds is damaged.
So, there’s always the logical question: Why did you get me out of Apple, or why didn’t we get into Netflix? And of course, the problem here is what we call hindsight bias. It’s easy with hindsight to identify Facebook or Google. And yet, we had Yahoo before we had Google. And when Google came along, it was not obvious that Yahoo would be sidelined. Motorola was one of the great electronics firms of the 20th century. Essentially, it’s gone. Netscape, again, they invented the Mosaic browser, which is what we call the web. They’re gone.
Blockbuster Video. Netflix came along and allowed you to mail in CDs, DVDs. Then they started streaming video. Blockbuster fought back. They didn’t fight back long and hard enough, but for a long time, it was by no means certain—especially when Netflix switched to streaming—that Netflix would be the victor. And so that’s always the problem with hindsight bias. It’s always easy with hindsight to pick the winners. And today’s winners will not necessarily be tomorrow’s winners.
So here we are at the end of a seven- to eight-year bull market. And we need to think about protecting our wealth by defensively being poised for corrections. That means multiple asset classes. Waiting for the opportunity to take advantage of those opportunities to present themselves in various asset classes. The struggle is, when we’re in an environment where five companies are doing all the heavy lifting and nothing else is, doing the right thing can feel awfully like you’re doing the wrong thing. And yet it’s still the right thing to do.
We wish you the best of investing success. Thank you.
“Most Stockmarket Returns Come from a Tiny Fraction of Shares.” The Economist, The Economist Newspaper, 23 June 2018, www.economist.com/finance-and-economics/2018/06/23/most-stockmarket-returns-come-from-a-tiny-fraction-of-shares?frsc=dg%7Ce.