The Only Mistake is Not Learning from Your Mistakes
“Thank goodness that’s over” was the opening line of the quarterly letter I penned on 4/1/25. Since then, in a state of total self-honesty and wanting to not look back on these letters and cringe, I have decided to re-write. However, it is important to ME, that YOU know, I did write the last letter on time.
For the past 2 years, every quarter I have given my opinion that we are getting closer and closer to some sort of economic break, of which I could never quite target specifically. The facts are bull runs don’t go up in perpetuity, nor in a straight line, and economies don’t operate this close to a razors edge forever. Today as I am reading and researching what is going on in the world of investing, I returned to a pair of economists that I have grown to admire, not only for their story telling and accuracy, but that they genuinely search out and appreciate a diversity of opinions in their ranks.
From Brian Wesbury of First Trust on 4/7/25 Titled “Tariffs, the economy and stocks”
One of the great mysteries of the past two years is why, given tighter money, economic growth didn’t slow down, much less hit a recession. One reason was that the federal government was engaging in the most reckless deficit spending in our lifetimes. Don’t get us wrong, we don’t believe government spending is good for the economy in the long-run. But, in the short-run, it can make things feel better.
I couldn’t (and didn’t) say it better myself.
Last quarter I wrote about the imbalance in equity indexes, that the S&P 500 has been so far weighted toward just a couple stocks (Mag 8 approx. 33% of the index market cap) and in fact I have lost several arguments regarding my diversification bias vs. concentration investing in the Mag 8 (or just buying the index). Trust me when I say I take no happiness in being correct, but I do wish this correction happened a little earlier, like last year when it should’ve. Of course, the highest ever interest rate increase in 2023 didn’t help my diversification advice, when low risk fixed income investments loss 17-20% of their value in 6 months.
I am not saying tariffs are blameless for the current market and economic trouble, but if it wasn’t tariffs, it would’ve been something else. The only common thread in recessions is that by and large, they are not expected. Volatility is the price of value appreciation in growth assets, no way around it.
There is no free lunch on Wall Street – Milton Friedman.
The good news? We have been here before. The last time the market acted in such a precarious and irrational way was in 2020 at the onset of Covid shutdowns. In case you forgot (like any of us could) those shutdowns were a global pandemic that shattered the economic and social lives of millions of Americans and Billions of people worldwide, not to mention the disastrous health epidemic from the disease itself. I recently came across my Covid vaccine card and am keeping it to always remind myself of that time and to remind my boys about that season in history.
Will I save some memento from April 2025? Some widget or piece of paper that reminds me of the time the President of the Unites States possibly acted irrationally and without much concern with short term consequences?
No, I doubt it.
So, this may all go down as another “mild” recession (last one was before Covid was 2009 btw) and we can look back as an opportunity to build significant wealth – for those of us that are involved in that. Also, as I mentioned before (I apologize, I am hearing a real “told you so” attitude, which I do not mean, just trying to emphasize a point) with the previous 2 years interest rate hikes, fixed income, annuities and alternative income are in a really good place right now to lock in long rates that may be better than in the near to intermediate future, so that’s good for income investors too.
I am much more comfortable in this new environment than I was just a week ago, as the market is pretty fairly valued after the price fluctuations and the income markets have something of value to add. This does NOT mean the tough times are over, actually the opposite, it’s the last 14 years that have been easy, the tough times are ahead. I expect future markets to be volatile and unkind, parsing through companies and investments that may sound good, but are value erasers. In fact, the last 14 years have been REALLY EASY, allowing investors to be lulled into a sense of accomplishment and expertise by buying almost anything seen on CNBC or touted by Jim Cramer and watching it go up. Dave Portnoy famously said in the height of the Covid rally “stocks only go up!” Nope, not true, and for the majority of the past 233 years since stocks started trading on the NYSE many stocks moved very little or went down in price, which lead to a thousand investment strategies and books like “One up Wall Street” that spawned an entire methodology to secure your future. Never has so much thought and work been diluted by so much apathy and simplicity.
Why do we think investing has gotten easier, when the rest of the world has gotten so much more complicated?
What got you here, won’t get you there.
I was talking with a colleague last week who is a very well renowned and successful portfolio manager in his own right, and we both agreed that it is likely much of the rest of his (and my) 20+ year careers will be spent in active management, using the complex tools created to attempt to minimize loss and maximize returns, not just picking the index. There will be winners and losers and selecting stocks. Bonds, markets and derivatives to lower volatility will be the name of the game…again.
To wrap a bow on this very personal letter, I haven’t written about tariffs and the technical issues with economic and trade policy. This is intentional as not only do I not have a crystal ball, but I don’t think I could read it properly anyway. No one can, or else all of us would have only invested in a certain energy beverage company that may or may not be named after a mythical creature that is typically large, ugly and frightening, whose stock is up 124,742% over the past 25 years. Then in a perfect fit of timing sold everything last October. Now is the time to lean on known lessons from the past, stay vigilant, be aware of the downside risk and trust those people on your team invested in helping you.
I have a couple more thoughts I want to get out, but that’s enough for now.
Phil
The views stated in this letter are not necessarily the opinion of Cetera Financial Specialists or LLC or Cetera Investment Advisers LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies.