My two biggest (related) investing mistakes; Why I have a positive macroeconomic view (part 1)
1) I always like speaking at special events and sharing stories with the audience – even if I'm also confessing my investing mistakes...
Yesterday evening, at an event hosted by the Harvard Business School Club of New York, I gave a slide presentation, took questions from the audience, and then stayed nearly an hour after the event ended to continue talking with a half-dozen folks.
It was a lot of fun – and it was great catching up with old friends and making new ones.
Today, I'd like to share the highlights from the first part of my presentation...
After I introduced myself and how I changed from an old-school value investor to what I call a "make money" investor (as I discussed in my May 31 e-mail), I shared the two biggest (related) mistakes in my career, which I've also been discussing in my e-mails over the past week.
The first is: I failed to follow the maxim that when you're in a bull market, ride it!
At every point in my investing career over the past 25 years, there has been a well-articulated bear case for why the market is soon going to go lower. This was as true at market peaks as market bottoms.
The single biggest reason my funds underperformed from 2010 to 2017, which is why I ultimately decided to close them, was that I fell for the narrative that another big financial crisis was just around the corner.
I didn't want to experience the pain of late 2008 and early 2009 again, so I sold my winners and positioned my fund defensively – holding lots of cash and short positions. In short, I battened down the hatches and prepared for a storm... even though the skies were sunny.
You can't let the occasional volatility shake you out of the market.
This chart below (which a friend included in his hedge fund's investor pitch deck) shows that the S&P 500 Index over the past 43 years has only been down for the year 10 times, and it was down by more than 10% (shown by the green line) only four times.
But the maximum drawdown during a year has exceeded 10% in 21 years – nearly half the time.
And the S&P 500 rose more than 10% in 24 of those years and only once had back-to-back down years (three years in 2000 through 2002).
The main message is that stocks are the best place to be for the long run... but that's only true if you stay invested.
I then presented this chart, courtesy of Visual Capitalist, which shows that missing 60 of the market's best days over 20 years reduced returns by a staggering 93%:
That said, there are times when savvy investors should prepare for a crash... but only when there are massive, obvious bubbles – not small ones like the meme stock bubble in early 2021 or GameStop (GME) in the past month.
I very publicly identified two market peaks in early 2000 and early 2008, but such bubbles and subsequent crashes occur roughly once a decade.
The rest of the time, you should ignore the ever-present fearmongering in the financial media and – assuming you own good stocks (or an index fund) – sit tight.
The second big mistake I made is: failing to let winners run.
I've discussed this many times – most recently in Tuesday's e-mail, using Netflix (NFLX) as an example – so I'll just share the conclusion here...
The key to long-term investment success isn't just being smart – and lucky – enough to own a few huge winners – you have to let your winners run.
2) Moving on in my presentation from yesterday, I then shared a number of slides that capture my positive macroeconomic view... which is why I remain constructive on stocks.
GDP growth has slowed a bit, but remains solid – as this 10-year chart of the year-over-year percentage change in GDP growth shows:
Consumer spending, which accounts for roughly two-thirds of our GDP, also remains strong: – here's the chart I shared:
Inflation has also come way down. Yesterday's report from the Bureau of Labor Statistics showed that it rose only 3.3% year-over-year in May, with no sequential increase from April to May – the first time that has happened since July 2022:
The Fed's preferred inflation measure, the core personal consumption expenditure price index – which excludes food and energy – is even lower at 2.8% year over year. Here's the chart I presented:
As I have been saying many times over the past year, I continue to believe that inflation will stay in the 3% to 4% range.
Meanwhile, as you can see in this chart, the unemployment rate remains near all-time lows:
Wage growth didn't keep up with inflation for two years but has now exceeded inflation for 12 consecutive months. Here's the chart I shared (a hat tip to Charlie Bilello in his latest blog post):
Lastly, manufacturing construction spending is booming, led by the tech sector:
In summary, the current economic picture looks good.
But I can hear the inevitable question: Is it driven by unsustainable deficit spending?
I'll show some data and give my thoughts on this in tomorrow's e-mail, so stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.