Investing Rule #1: When Leading Businesses Go on Sale, You Buy More – A Historical Perspective

Key Points

• The Fed “normalization” process is well under way. The damage has been severe.

• Attractive forward returns come from a willingness to buy quality stocks on sale.

• History shows buying industry leading brands after drawdowns tends to be wise.

The Feds “Normalization” Process Has Created Opportunities.

First, I hope you had a wonderful and relaxing holiday.

In case you missed last week’s blog, I’ll start with the same theme. There’s been significant damage to asset prices in 2022. This year has been one of the most difficult environments for investors of almost every asset class. Here’s the updated 60/40 portfolio yearly scorecard going back in time via a recent report from Private Equity leader, KKR:

First, let’s talk about the macro environment. In our opinion, it will be very hard to get back to a 2% inflation target. Why? Because 2% inflation was an anomaly. Between 1955 and 2006 when Ben Bernanke took over at the Fed, the average Fed Funds rate was just over 5% (we are headed back there), and the average inflation rate was about 4% (we see that as a more normal resting heart rate). This is “normal”, not 2% inflation and zero interest rates. Regardless, we are well on our way to normal but have a little more to go. As you know, the journey back to normal has been a rocky one. Asset prices have struggled mightily and now, some of the greatest companies ever created have seen 20-70% drawdowns during 2022. While painful to experience, drawdowns do allow savvy investors the opportunity to buy more of great businesses on sale. I think the concept of “buy low, sell high” is still a timeless approach to generating returns. I suspect you would agree.

Buy Low, Sell High.

Even average companies perform well in raging bull markets and strong economic cycles. It’s the more difficult periods when companies can set themselves apart from the peer group. Having the ability and interest to invest for the future while peers are retrenching is a hallmark of top companies (brands). Having a strong balance sheet to withstand difficult economic periods is vital. Generating significant free cash flow to make acquisitions, create new products, pay down debt, buyback stock, and pay dividends is also very important. We are now leaving the abnormal interest rate and inflationary environment we have been in since 2008. Zero interest rates and abnormally low inflation led to massive misallocations of capital and the creation of asset bubbles. As the process of normalization continues, the road should be expected to stay rocky for a bit longer. However, the opportunities created will be robust. As I write this commentary, sentiment towards equities continues to be extremely negative and general positioning in equities is underwhelming. The lack of committed buyers is what keeps a lid on any rallies for now, but once we have some more clarity on the trajectory of rates and inflation, investors looking for bargains should get more attention. At some point in 2023, I suspect we will see a lot of buyers rushing through a narrow door as everyone tries to get “right-sized” in equities all at once. Today, it’s very difficult to find anyone bullish and very easy to find any number of dire bearish outcomes. That’s usually a decent time to start building more exposure to great businesses. Being a contrarian has always served me well, even if I was a bit early to the party.

Iconic Brands: A Long-Term History of Opportunity

Our team created the top global brands equity strategy because we understand that leading companies tend to outperform over long periods of time. Outperformance rarely happens every single year, that’s not realistic or required. The compounding effect of great businesses doing better than peers often leads to significant alpha generation. The trick to all of this is that you must stay engaged during difficult times. If you try to ride the best horses every year and jump to what you think will be the next greatest horse, you will invariably miss wonderful opportunities, create a tax headache, and feel like you are always chasing yesterday’s cheese. Peter Lynch’s success while running the Magellan Fund offers some great reminders to us all. When you have done the research and know your companies well, you get excited to buy more stock on sale. Mr. Lynch loved to average down when markets put his stocks on sale. The markets tend to be manic for periods of time, but out of this manic behavior comes terrific buying opportunities. The best buying opportunities always happen in bear markets and when sentiment is poor. The bigger the opportunity, the more your stomach hurts when thinking about buying more. I remember adding to my favorite brands in February and March of 2009, it felt horrible and made me a bit nauseous, but it was absolutely the right thing to do. That’s the way I feel going into 2023. It’s time to pick your spots and start planning your cost averaging strategy. If a company is still dominant in its category and the stock has suffered a deep drawdown, why would you not want to buy more? Maybe I’m crazy but I always feel like I’m cheating the system when the market gives me an opportunity to buy more shares of great businesses that are suffering short-term. When your time horizon is in the years, you should take these opportunities and put your hard-earned money to work at better prices. The history of markets has proven this over and over. If you follow my posts regularly, you’ll know how powerful cost averaging can be over time. As we get ready to enter 2023, we are being offered attractive entry points for our favorite companies. The best part, you don’t have to nail the bottom. You just need to commit to a cost average approach in tranches..

I thought it would be fun to take a handful of leading brands across different industries and show how they have performed since becoming public stocks. I compared them to the S&P 500 and then showed what the YTD drawdown has been, what the average drawdown in negative years was, and then looked back in history to see if buying those stocks after the negative year turned out to be a smart decision. The results aren’t surprising. Buying great businesses after a big down year tended to offer a strong forward return experience. I expect the same result in the forward years.

Included in this analysis: Amazon, Apple, Google, Estee Lauder, Intuit, Nike, LVMH, Lululemon, Microsoft, Domino’s Pizza, Costco, Target, Williams Sonoma, TenCent of China, and Mercado Libre of Latin America. FYI, we own some of these brands at the current time and are looking at others for entries.

Data source: Morningstar, Ycharts & Accuvest.

The green column shows how each brand has performed since becoming a public company. These brands have performed incredibly well over the long term. The next column shows how the S&P 500 performed over the same period. The next vertical column shows how each brand has performed in 2022. As we have learned already, there have been some extreme drawdowns this year. Most importantly, I show how many negative years each brand has had. Even great companies turn in negative years and sometimes they have multiple negative years in a row. But as you can see from the orange columns, even with these negative years, the long-term performance has been stellar. Generally speaking, when great businesses turn in negative performance years, the forward 1-3 calendar years tend to be above average. Sometimes this performance is linear and sometimes it’s chunky, but over time, great businesses just keep winning and performing.

No one knows what the future holds, maybe 2022 is just the beginning of a deeper down cycle for stocks but I feel confident that a willingness to own great businesses when the market acts irrationally and being willing to add to these stocks on sale, is ultimately a wonderful long-term opportunity for your portfolio. I add funds to my brands portfolio every single month and I feel confident my return on these investments will generate an attractive return because that’s the nature of investing in great businesses. Happy New Year!

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

The Fed, Fed Funds, CPI, and Stock Returns: A Historical Perspective

      Key Points

• The Bernanke-Yellen-Powell period is abnormal regarding Fed Funds & CPI.

• The economy and stocks have performed well in more normal & higher periods.

• The road to “normal” has been rocky but normal is a much healthier destination.

Zero Interest Rates and a Low Cost of Capital is Neither Normal nor Healthy.

2022 has been one of the most difficult environments for investors of almost every asset class. If you need proof, here’s the updated 60/40 portfolio yearly scorecard going back in time via a recent report from Private Equity leader, KKR:

As you know, interest rates and inflation have been on the rise and the trajectory has been severe. It’s important to remember that the inflation we have today is largely man made and the trajectory of rates and inflation is the “accident” that caused all the chain reactions in asset prices. We can thank our politicians and the Federal Reserve for higher prices and the carnage in our investment portfolios. It didn’t have to happen this way. I could write a separate blog on the arrogance and ineffectiveness of the Fed as an organization but suffice to say, the real problems likely began when Ben Bernanke arrived at the Fed in 2006. The trio of Bernanke, Yellen, and Powell has consistently gotten important decisions wrong, failed to see trouble when it was obvious to others, acted too late, and stayed easy far too long. It seems absurd that any central banker could be successful at smoothing the business cycle, let alone for Powell and Co. to accomplish this for a $21 trillion economy.

Regardless, we all must decide how to allocate for the next one, three, and five years with a new normal in mind. We know with certainty that the Fed wants to normalize rates after holding them artificially low for over a decade. Man-made inflation gives them air-cover to do so. Every consumer and every investor needs to have a grasp of history during higher rates and higher inflationary periods. With that in mind, I wanted to offer some perspectives and only the facts. The last 16 years with zero rates and abundant access to capital at almost zero cost are gone. This was an abnormal time, and our muscle memory needs to be re-set. Currently, the bears will say this reality makes it difficult for asset price appreciation. So, rather than state my opinion, I wanted to look back in time to see what happened in other periods when rates and inflation were higher. The data source for Fed Funds & CPI data come from the St. Louis Fed website and the S&P 500 data is from Bloomberg:

Normal:

From 1/1/1955 to Ben Bernanke’s arrival at the Fed 2/2006, Fed Funds averaged 5.63%.

Over this same period, the average CPI (inflation gauge) was 4.0%.

During this 50+ period, U.S. GDP averaged 3.24%.

The S&P 500 annualized at 10.85% and its cumulative return was 19,244%.

Abnormal:

The Bernanke, Yellen, Powell era.

From 2/1/2006 to the pivot point in rates on 3/2022, Fed Funds averaged 1.13%.

Over this same period, the average CPI (inflation gauge) was 2.2%.

During this 16-year period, U.S. GDP averaged 1.73%.

The S&P 500 annualized at 14.7% and its cumulative return was 392%.

Perspective: Alan Greenspan was the Fed Chairman from 1987 to 2006 when he handed the reigns to Ben Bernanke. Here’s what a more normal period looked like under Greenspan:

Fed Funds averaged 6.73%.

Average CPI (inflation gauge) was 4.3%.

U.S. GDP averaged 3%.

The S&P 500 annualized at 10.63% and its cumulative return was 424%.

If I were a betting man, I would guess the next five years looks like a Fed Funds average rate of between 4-5% and a CPI that averages 4%. This just happens to be in-line with the long-term ranges. Here’s a graph showing how the smart professionals at KKR see the next few years. In short, growth is generally fine and inflation metrics mean revert towards long-term norms.

Conventional Wisdom: “Stocks Cannot Generate Attractive Returns with Higher Rates And CPI”

Here’s where the research project gets fun and interesting. Remember, from an interest rate and CPI perspective, it’s the speed of the move that matters much more than the direction. The Fed’s new “projected” target rate is somewhere between 4.75% and 5.75%, a wide delta one could drive a truck through.

The uncertainty should continue for a little while longer. But the good news for investors with more than a five-day time horizon is that they’re getting some very attractive buying opportunities between now and when the Fed ultimately decides to slow the pace of tightening as we get back to normal rates. I suggest you buy in tranches because catching the bottom is always very difficult. I have already shown you the value of using a cost averaging strategy in former posts.

At 4.25%-4.5% today, the bulk of the rate increases have largely been accomplished and the market is now adjusting for this updated range from the Fed. As the economic data and the economy get weaker, inflation should continue to trend lower, long-term rates should also trend lower and the Fed can then begin to ease up on the aggressiveness (trajectory) of the hikes. That should be greeted positively by markets, particularly given how currently bearish positioning and sentiment are.

Below, I have listed extended periods where the Fed Funds rate ranged between 3% and 5.5% with a more normal CPI versus the most recent abnormal period. This range in these metrics is likely what we will experience over the next five years

From 7/1/1963 to 11/1/1968, Fed Funds rate averaged 4.39% with CPI averaging 2.4%.

The S&P 500 Index delivered a total return of 11.2% annualized and 77% cumulative.

From 8/1/1970 to 1/1/1973, Fed Funds rate averaged 4.82% with CPI averaging 4.66%.

The S&P 500 Index delivered a total return of 22.3% annualized and 63% cumulative.

From 3/1/1975 to 8/1/1977, Fed Funds rate averaged 5.26% with CPI averaging 6.9%.

The S&P 500 Index delivered a total return of 12.8% annualized and 34% cumulative.

This is very interesting. Here’s a chart from Michael Cembalest of J.P. Morgan showing the 1973-1977 bear market along with the trajectory of earnings, payrolls, and GDP. People constantly cite the 1970’s and 1980’s as the most similar time periods to our current experience. Earnings and payrolls peaked about the same time as stocks bottomed out after a big drawdown. We will have to wait and see if a similar experience occurs in 2023. Nobody expects it, that is for sure. In the 1980’s double dip recession, earnings again held up as the market fell precipitously. The market fell about 10% more from the peak of earnings to the trough in markets. Again, we will have to wait and see how 2023 turns out.

Here’s the other periods that looked similar to what we expect going forward. Again, much better than the current bearish expectations.

From 5/1/1991 to 5/1/2001, Fed Funds rate averaged 4.92% with CPI averaging 2.7%.

The S&P 500 Index delivered a total return of 15.25% annualized and 313.7% cumulative.

From 8/1/2005 to 1/1/2008, Fed Funds rate averaged 4.76% with CPI averaging 3.2%.

The S&P 500 Index delivered a total return of 9.4% annualized and 24.5% cumulative.

Just for fun, I looked at the data series for periods when Fed Funds & CPI were mostly well above average just to see what stocks did during these periods. The most prevalent period from 1955 to today is highlighted below. Honestly, I would not have expected the outcome below, but it’s a pleasant surprise.

From 9/1/1977 to 4/1/1991, Fed Funds rate averaged 9.5% with CPI averaging 6.1%.

U.S. GDP averaged 3.1% annually over this roughly 14-year period.

The S&P 500 Index delivered a total return of 15.4% annualized and 635% cumulative.

You can be sure the earnings and margins of companies were impacted by high rates and inflation just as people expect for 2023. Yet somehow the market managed to deliver attractive returns to patient investors. Perhaps history will rhyme going forward.

Importantly, markets were volatile given the uncertainty. During this period there were two 15% drawdowns during 1982 and 1990. There was also a major drawdown in 1987, which was created by the long-term capital portfolio insurance debacle. Yet despite this, stocks performed above long-term averages even when considering corrections and a full market crash. Don’t lose sight of the big picture.

The Good News: The Destination of Normal is a Much Healthier Place Long-Term.

Getting back to normal and staying there for as long as possible is a very positive development. Please make sure you own high quality assets with strong balance sheets and leadership positions in key industries. Sanity is coming to a theatre near you. The journey has been rocky, but the destination looks more like goldilocks.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

A Historic Amount of Wealth is Transferring

This will be the x-factor for consumption stability

Key Points

• Demographics play an important role in global GDP and consumption trends.

• Trillions in cash and valuable assets are passing from older people to younger ones.

• The brands that are favored by Gen-X, Millennials, and Gen-Z stand to benefit most.

“By 2042, Baby Boomers are poised to hand over as much as $70 trillion in inheritance to their heirs…this will be the most significant transfer of wealth in American history, turning the spotlight on a newly minted nouveau riche multiracial consumer base equipped with considerable buying power“. Source: Mckenzie Research.

Demographics Matter

I have written about the historic wealth transfer that’s just begun in the U.S. many times and with this year’s volatility across consumer stocks in particular, I thought it was important we all keep our eye on the prize so we don’t lose sight of one of the largest investment opportunities we will see in our lifetimes. Millennials and Gen-Z are likely the primary beneficiaries of the wealth that’s being transferred from Boomers & their parents. I’ve seen it firsthand across my friend cohort, a handful of friends have been the beneficiaries of some large pools of assets as their parents and grandparents pass away and their assets get passed down. Cash, real estate, art, and other monetizable, tangible assets are coming to younger consumers and the process is not expected to be completed for another 20+ years. If I could teleport myself to 2045 and inspect macro datapoints like retail sales, personal consumption expenditures (PCE), and the top line revenues from the most relevant brands, I would bet you a taco they would be among the most robust & stable data series across markets. The wo0rld has been underestimating the consumer for as long as I can remember and most of the time, that’s been a very bad bet. With trillions passing from savers who spend to spenders who save, this slight nuance should offer a significant x-factor to the consumption theme and the companies that serve this theme. Brands have always mattered, but they will really matter over the next 20 years. This is one of the reasons our team created the brands investment strategies in 2015. We were excited to build a portfolio dedicated to stable & predictable themes like consumption. Importantly, there is still no other brands-dedicated equity strategy for investors and we hope it stays that way.

Below, I have highlighted where the collective wealth exists in our society. As you might expect, older people hold all the wealth, but younger people will receive a wall of money and assets over time. Remember, as we age, our spending begins to fall. Historically, our spending begins to peak around ages 55-60 and it deteriorates each year thereafter. Younger cohorts, however, really hit their earnings and spending stride beginning in their late 20’s as they get married, have kids, buy houses, invest in their 401(k)’s and save for college and retirement. If you want to see what happens to the economy when a large population group reaches the sweet spot of spending and earning, look no further than what the Baby Boomers did to the economy and real estate prices beginning in the early 1980’s! That was a very robust 20-year period.

The Wall of Money & Assets Coming to Younger Consumers is Historic.

Retail Sales and PCE has always been lumpy at times, but the trend with very few and short exceptions has been up and to the right. That’s what makes this investment theme so powerful. It’s also the reason the Consumer Discretionary & Tech Sectors have typically been outperformers over time. The most relevant brands tend to cluster in these two sectors making them solid long-term bets in our opinion. The best opportunities to invest in the greatest consumer brands have always been when they are in one of their underperforming periods. That’s where we are today. These rare periods never feel good, but opportunists should be licking their chops. When you know how the movie ends, you get a wonderful opportunity to buy great businesses serving U.S. and global consumers on sale. Aside from the trading community, that cares about nothing other than the next 5 days, most of us are investing for a long period of time. So, having a core allocation to the global consumption theme and adding to it during weak periods offers a wonderful one-two punch for part of the investment portfolio.

The below graphic highlights who will be inheriting the assets along with an estimation of how much in aggregate is likely to be transferred. This one graphic illustration could be one of the most powerful hints at the future I have ever seen. The key to benefitting from the wealth transfer phenomenon is to understand which companies or brands Millennials, Gen-X, and Gen-Z are fiercely loyal to. It’s these brands that have an extraordinary opportunity for strong growth and subsequently, attractive total returns for investors. That’s where our team spends a massive amount of time. To be sure, this is a slow-moving train. But if you see the big picture clearly, any weakness in these brand beneficiaries can be used to increase the positions at better prices.

Which Brands Have High Brand Love With Millennials & Gen-Z?

The holy grail of investing in brands happens when you can identify the brands that young, middle-aged, and old consumers love and when the phenomenon is global in scope. There’s 8 billion people on the planet, so if a company delights a massive demographic cohort on a global basis, the revenue and free cash flow opportunities can truly be enormous. If you want evidence, simply look at Apple with $394 billion in trailing 12-month revenue, Amazon with $502 billion, Walmart with $600 billion, and Google with $282 billion in annual revenue. These are staggering and historic levels of revenue and brand love is at the center of this operating metric excellence.

Our team does extensive research on brand relevancy and high brand love. This work is one of the inputs we use to select which brands to own in our portfolios. Today, I thought I would highlight some third-party research highlighting which brands are really resonating with younger consumers along with our own. Many of these also resonate with my generation (Gen-X) and even my parent’s generation (Silent Generation). So long as these brands continue to listen to their loyalists and continuously endeavor to build a broader, more global list of buyers, their businesses should remain attractive, and their stocks should be strong performers.

Based on our research along with the research from brand analysis firms Comparably, Morning Consult, and Moosyvania, the following brands keep rising to the top from a brand love and brand relevancy perspective where Millennials, Gen-X, and Gen-Z are concerned:

Peloton, Amazon, Google, Netflix, Apple, Costco, Delta Airlines, Uber, Zoom Video, Nike, Spotify, Southwest Airlines, Target, Walmart, Microsoft, Nintendo, Airbnb, Adidas, Starbucks, Coinbase, Domino’s, Shopify, Chewy, Zillow, T-Mobile, Coke, Marriot, Disney, Home Depot, Pepsi, Square, Tesla, McDonald’s, Sephora (LVMH), Instagram & WhatsApp (Meta), Doordash, Snap, Visa, Roblox, Lululemon, Chipotle, and Estee Lauder to name just a few.

There’s a lot of overlap across the demographic groups and not surprisingly, these brands have been stellar performers over the years. But, not all brands will hold their brand relevancy over time. That’s why it’s vital for investors to continuously pay attention to how brands engage with consumers. Once a brand becomes irrelevant, it is very difficult and expensive to try and regain relevancy. Those stocks tend to be melting ice cubes and a source of serial underperformance. Our team owns a collection of the brands above and would love to own a handful more if the prices pulled back to our buy zone. Our comprehensive research has allowed us to identify some real “emerging brand” opportunities which often offer significant returns from a stock perspective. The real magic happens when you identify an emerging mega brand or brands early and before the market sees the high brand relevancy. That’s where I enjoy spending a good portion of my research time.

Bottom line:

• There’s significant alpha to be generated when you invest with demographics in mind.

• The current wealth transfer opportunity is the largest in human history.

• There are a few dozen brands that stand to benefit the most. Their futures are very bright and their stocks are likely being under-estimated by the market today.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

A Historic Amount of Tax Loss Selling Today Leads to Great Buying Opportunities for Tomorrow

Key Points

• Virtually every asset class around the world has a negative YTD return, that’s rare.

• Do not let wild swings in prices shake you out of solid investments.

• Tax loss volatility allows investors to re-set client cost basis and upgrade portfolios.

“I think there will be a lot of tax loss sales happening into year-end…I would say this is the biggest tax loss selling opportunity in one or two generations”. Jeff Gundlach, DoubleLine Capital

2022 Has Not Been Kind to Investors. The Damage Has Been Broad Based.

If you are an investor or a manager of other people’s investments, 2022 has been a particularly difficult year. Generally, fixed income assets act as a safe haven when stocks are under siege. But when inflation and rates are rising, very few assets get spared. Today’s 60/40, 70/30 portfolios are very likely negative on the year. It’s times like these that we need to remind ourselves how very rare the 2022 investment experience really is. It’s also a time to remind ourselves what we should be doing in such a rare time: fade the extreme case (negative returns) and position for more normal periods (positive returns). No one knows what the future holds but historically speaking, when virtually every asset class is negative for a calendar year, like 2022 is shaping up to be, the following year is a much better experience. Interest rates in the U.S. already look like they have peaked, making fixed income look much more attractive and still on sale. Equities could remain volatile for a bit longer, but there are some very exciting opportunities developing here and around the world. No one enjoys going through this rare period, but, if history is any guide, the end result is a much more attractive investment experience. To put the current dreadful year of returns into perspective, I looked at Morningstar.com and did an analysis of each style box across active funds in equities and fixed income (>7000 Funds). You can extrapolate the same info across the ETF spectrum (>8000 ETFs), there were very few places to hide this year and the investment wrapper (fund/ETF) was not a factor. Here’s the results:

Remember, equities are positive about 80% of the time. So as an investor, history says you should be thinking about adding to equities, not getting into your bear suit after the carnage has happened. Investors tend to get too cautious AFTER the carnage and they tend to be uber-bullish AFTER strong return years. That’s exactly the wrong way to invest. Collectively, it’s all of our jobs to educate investors and help them be better and generate greater returns over time. Now is one of those periods as we head into 2023.

Because we do not know where markets will ultimately bottom, I would advocate for a systematic tranche approach to get more exposed to equities into any additional weakness, particularly those caused by artificial tax loss harvesting.

Do Not Let Market Volatility Take You Out of Smart Investments & Themes.

When investors all around the globe do their tax loss harvesting, volatility can emerge, and it can test your resolve and your willingness to stay engaged in your well-constructed portfolio. Investment research firm Dalbar has been studying investor behavior for decades. The conclusion from their research is that the average investor earns below-average returns. For 20 years ending on 12/31/2019, the S&P 500 averaged 6% per year. Yet, the average equity investor earned about 4.2% for the same period. Why? The study showed investors buy high and love to add when markets are strong. They then tend to pull money out when stocks are volatile and struggling. Our industry remains the only place where sales in otherwise great merchandise are ignored or shunned. Investors tend to overreact in times of uncertainty because they extrapolate current fear into the future as if the fear will never end. At the very minute people are selling and thinking a group of stocks or bonds will never recover, things mysteriously turn. This leaves investors back on their heels and under-exposed. I can tell you from all my conversations over the last 6 months, the average investor is very defensively positioned, under-exposed to cyclical stocks, and holding excess cash. That tends to make us feel good on down days, but it rarely helps us meet our long-term goals. Just remember, they do not ring a bell at the bottom, and buying fear is how people get paid well over time. If you see some big bouts of volatility over the next 30 days, please remember tax loss harvesting is an artificial catalyst with a limited shelf-life.

Great Companies & Brands Are on Sale & Tax Loss Harvests Offer Opportunities.

Advisors are performing their annual tax loss harvesting process as we speak. This is an opportunity to reset a client’s cost basis. No one likes to see a portfolio with a host of ticker symbols with parentheses around them. The longer the client statement shows negative returns, the more a client will question the capabilities of the advisor and the viability of investing in general. Today’s tax loss harvest period offers a chance to reset the portfolio to different strategies, all of which are on sale today. Difficult years like 2022 also allow investors to assess whether their portfolio is well positioned for the future. It’s very important to not extrapolate one year’s performance and make long-term allocation decisions based on one year’s returns. How did your funds and ETF’s do for the 3-5 years leading up to the peak in November 2021? That analysis likely helps decide if the focus of the strategy is timeless or not.

We have not seen inflation like we have today for over 40 years, nor have we seen a Federal Reserve this aggressive and hawkish for a long time. These are outlier events and should not be relied upon for long-term portfolio positioning. The most important thing to do in times like today, in our opinion, is to anchor timeless and common-sense strategies that win more often than they lose. One approach is to endeavor to understand the primary driver of every economy in which you invest. Make sure you have sufficient exposure to that driver in a portfolio and most importantly, do not let short term volatility shake you out of letting your logic and common-sense drive decisions.

Do not allow your clients to be the confirming evidence from the Dalbar studies. Be a contrarian, be opportunistic, and take advantage of these more difficult and volatile periods by adding to the strategies and companies that have stood the test of time.

I wrote about the benefits of cost averaging and buying more of great brands in September. I showed readers a few examples of the benefits of holding a core consumer allocation and adding to great brands when they are down 25% or more from highs. Cost averaging into more exposure can add a significant amount of value when you check your emotions at the door. Here’s the link to that blog post:

Cost Averaging into Brands Adds Significant Value

Does it really matter where the ultimate bottom is when you have some of the most profitable companies ever created on mega sale? Here’s a quick list of the percent off the all-time highs for some wonderful Mega Brands. I don’t know about you, but to me, these are some tasty and rare sales across the brands spectrum.

• Spotify -79% off the highs.

• Meta (formerly Facebook) -71%

• Paypal -74%

• Netflix -59%

• Tesla -55%

• Disney -51%

• Amazon -50%

• Estee Lauder -41%

• Intuit -45%

• Nike -41%

• Google -36%

• Domino’s Pizza -31%

• Microsoft -33%

• Lululemon -25%

• Home Depot -22%

• Apple -19%

• Lowes -19%

• Starbucks -21%

• Chipotle -23%

Bottom Line:

• 2022 is a very rare year where both bonds and stocks are broadly negative.

• Valuations across stocks and bonds have been re-set lower, offering better value.

• Not every stock is well positioned for an above average inflationary environment.

• Great businesses with economic moats, strong balance sheets, and predictable profits offer significant value to investors.

• Many of these businesses are well off recent highs and are offering much better entries.

• Do not let the short-term volatility caused by tax loss harvesting dissuade you from being opportunistic.

• Volatility is the friend of the long-term investor because they take advantage of weakness and get great stocks on sale.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

When Do Markets Bottom?

When Do Markets Bottom?

There is a lot of guesswork on where this bear market will ultimately bottom. Guessing is not really a valuable spend of time in my opinion because seeing into the future is not possible. My goal is not to sound smart, my goal is to adapt to markets and buy great businesses with strong profitability and FCF generation and that have long runways for growth ahead. When I can get them on sale, I like it even better. 2022 has been a painful year for the long-only crowd but we have not seen sales on great companies like this year in a very long time. As Apollo Management likes to say, the best returns come when you buy at low prices.

Traders do not like to buy stocks under the 200 day moving average because “bad things happen under the 200” but if you have some duration, you should want to see your favorite companies trading low so you can accumulate more shares. It’s not rocket science. Only in this industry does great merchandise on sale NOT intrigue shoppers. Probably the silliest thing I have ever seen. Check your emotions at the door while investing, they have no place in this room.

The current consensus thinking goes something like this: stock markets fell, multiples fell because inflation was high, interest rates were rapidly rising, the Fed was aggressively normalizing policy rates which had a big impact on the dollar rising. So stocks fell hard on these macro data points and have stabilized for now. The next shoe to drop they say, is the earnings slowdown/recession that is inevitable in 2023. All very logical views in my opinion.

The real question: Do markets discount a recession TWICE (2022 and then again in early 2023 as earnings begin to reflect what markets know already) or do stocks fall all at once incorporating all the bad news by connecting today’s dots of inflation, multiples re-setting, and an eventual fall in earnings while finally putting in a more lasting bottom well in advance of the actual earnings degradation? This is literally the most important thing playing out in markets today. Everything else is just click-bait in my opinion. Certainly, if the news flow continues to get worse, aka more systemic issues from FTX fallout or war in Ukraine, etc, markets can react to the news cycle but ultimately earnings drive the future of stocks and stocks fall in advance of falling earnings and bottom well in advance of the final earnings trough.

Since we know we can’t predict the future with anything better than 50/50 odds, let’s look at some former bear market periods as examples of this thesis to see if we can spot any patterns that help better our odds of understanding the future. These charts came from a recent JPM “Eye on the Market” report from Michael Cembalest, a very good strategist. I’ll cut to the conclusion for those that don’t want the history lesson. Here’s what Cembalest says about our market today and the potential bottom in stocks:

“As for the latest bear market, I see no reason why this cycle will not end up looking like most of the other ones. If so, the bottom in equities will occur even as news on profits, GDP and payrolls continues to get worse. When will that be? We will be watching the ISM manufacturing survey very closely. It has a good track record of roughly coinciding with equity market bottoms, as shown in the table. I would consider 3200-3300 on the S&P 500 index good value for long term investors, if such levels were reached sometime this fall/winter.”

My thoughts: If markets tend to bottom BEFORE the profit, GDP and payroll data bottoms and we reasonably expect earnings troughs to be somewhere around the April earnings period (better companies will see fundamentals fall less and stabilize faster, others will take longer), then somewhere around here to early Q1 should be where equities find a more lasting bottom. That will help sentiment mightily which could speed up the recovery in alot of other areas and create a major positive feedback loop we haven’t seen for a year. Maybe the market bottoms coincident to the Feds last rate hike, I have no special skills to guess, but it seems the clock is ticking on an equity bottom based on price and the tendencies for a bottom to occur before the fundamental data bottoms.

Period #1: The Eisenhower Recession June 1957 to June 1959 period

In this period, the S&P fell roughly 17% from June 1957 to the trough for the market year end 1957. Earnings started to roll over AFTER the market as we would expect. Earnings didn’t trough until the Q3/Q4 1958, almost a full year AFTER the market bottomed. The overall GDP trough came 6 months AFTER the market bottomed. The payroll trough came just before the earnings trough. From the S&P trough in late 1957 to June 1959, the S&P rose about 47% in about 18 months.

In this example: the market bottomed well before the earnings, payroll and GDP data did.

Period #2: The Stagflation period of the 1970’s: The June 1973 to December 1976 period

In this period, the S&P fell roughly 38% to the double bottom trough for the market year in Q3/Q4 1974. Interestingly, earnings kept rising as they are likely doing today because of inflationary pricing and did not peak until roughly the market bottomed in late 1974. Earnings gently fell for about 9 months before rebounding back to all time highs by year end 1975. The overall GDP trough came 5-6 months AFTER the market bottomed. Payrolls peaked about the time when earnings peaked, aka around the same time as stocks bottomed. Payrolls fell fairly sharply and bottomed a few months before earnings bottomed and again, went on to all time highs by the end of 1976. From the S&P trough around December 1974, the S&P rose about 55% over the next 24 months.

In this example: the market bottomed about the same time as earnings & payrolls peaked and about 3-4 months before the trough in overall GDP. Lets call this period more similar to today’s environment. Perhaps that’s what we see this time?

Period #3: The Double-Dip recession period of the 1980’s: The December 1980 to Q1 1985 period.

In this period, the S&P fell roughly 20% over an 18 month period to the trough around mid 1982. Similar to today, there was a massive demographic group just beginning their earning and spending cycle, let’s call them the Baby Boomers. Today, it’s the Millennials and they are slightly larger than the Boomers and have another generation after them just as big, these are GenZ. So we have 2 generations, both larger than the Boomers just beginning their spend/earn/save cycles. That’s NOT bearish folks. Granted, today the standard of living is much less attractive as Boomers bought houses at 14-30k and now those homes are $400+k, etc.

Earnings kept rising as they are likely doing today because of inflationary pricing and did not peak until roughly 6 months before the market bottomed. Earnings rolled over and bottomed roughly 6 months AFTER the market bottomed then recovered nicely past the former peak. GDP was volatile but didn’t really fall that much during this period and bottomed around the same time as the market. Payrolls peaked about the time when earnings peaked, and both bottomed AFTER markets bottomed. From the S&P trough around Q3 of 1982, the S&P rose about 56% over the next 36 months. Importantly, the S&P ripped straight up from the bottom for the next year until the market saw about 12% pullback the following year but recovered all those gains 6 months later.

In this example: the market bottomed about 4-6 months BEFORE earnings, and payrolls and coincident with GDP. Again, let’s call this period more similar to today’s environment with inflation & double dip potential. Perhaps that’s what we see this time?

Period #4: The S&L crisis of the 1990’s: The December 1989 to about mid 1993 period.

In this period, the S&P fell roughly 15% over a roughly one year period to the trough around late 1990. Earnings rolled over just about the same time as the market was bottoming and earnings didn’t trough until about January 1992! Payrolls bottomed about 9 months AFTER the market bottomed as did GDP.

Earnings and payrolls crawled along the floor for about a year but GDP and the stock market recovered much quicker. From the trough market level around late 1990 to the middle of 1993, the market rose about 47-50% by my eyes.

In this example: the market bottomed about 12 months BEFORE earnings, and ~6 months before payrolls which was similar to the GDP trough.

Period #5: The Dot-Com Bubble recession beginning December 1999 to Q1 2004

Here, I’ll quote Cembalest: The Dotcom collapse is the outlier: “the earnings decline preceded the equity market decline, there was barely a recession at all, and the mini-recession of 0.3% preceded the equity market bottom by more than a year.”

Value stocks did quite well in 2000-2001 before 9/11 happened then we had a short, shallow recession and stocks bottomed in Q1 2003 while earnings bottomed much earlier. That period seems more unique versus all others, other than high valuations for the tech sector.

Period #6: The Financial Crisis: The early 2007 to early 2013 period.

In this period, the S&P fell roughly 40% from late 2007 to March 2009. Consumers were over-levered, flipping houses using no-doc loans and the housing market was on fire. Earnings rolled over just before the market began its fall. The market bottomed in March 2009 while earnings bottomed about 6 months later. GDP bottomed right about the same time as the market in early 2009. Payrolls bottomed about a year AFTER the market.

From the trough market level in March 2009 to the forward 12 months, the market rallied about 40% and the market rallied roughly 110% from the lows in 2009 to around Q1 2013.

In this example: the market bottomed about 6 months BEFORE earnings, just before GDP and about 9 moths before payrolls.

Period #7: The Global pandemic period of December 2019 to peak market in late 2021.

This was such a catalyst driven market crash so it’s hard to make too much out of the data but let’s see what happened. In this period, the S&P fell roughly 30% rather quickly as fear, uncertainty, doubt, and misinformation was rampant. Consumers were paid to sit at home and shop online while not working much. Earnings rolled over with a lag and didn’t bottom until 9 months AFTER the market. Payrolls dropped off a cliff for a period of time but bottomed a few months after the market. GDP bottomed about 6 months after the market as well. With stimulus and Fed free money, everything recovered much faster than most believed possible in the depths of the pandemic.

From the trough market level in late March 2020 to the forward 12 months, the market rallied about 45%+ and just kept on going until the peak in late 2021 when we started to see inflation rise and multiples begin to contract. Now we are seeing what appears to be PEAK inflation and PMI prices and markets appear to be stabilizing, are still above their recent lows and have positive seasonality into the year end. The Fed is still on everyone’s radar but for me, thats old news. EVERYONE expects earnings in 2023 to be negative and for a recession to arrive.

In this example: the market bottomed about 9 months BEFORE earnings.

Period #8: Our current high inflation, Fed policy normalization bear market starting in June 2021 to November 2022

Poor Fed policy, poor Covid response policy, and an over-stimulated US economy drove today’s inflationary bear market. Valuations were high, interest rates were far too low for far too long, and the cost of capital was far too low for far too long which created all sorts of misallocations of capital. Zombie companies that never should have been created will continue to float to the surface as interest rates normalize and monetary policy stays tight. Long-term thats a good thing, shorter term, it offers a rocky road. The good news: great businesses are already on sale and may continue to be put on sale for a bit longer. The Fed has stated their intention of pushing Fed Funds to 4.75%-5.25% before sitting on hold for a while. As inflation comes down, they will be lowering rates to keep the delta between rates and growth at appropriate levels.

Thus far, equities have fallen anywhere from 15-40%, with the average stock pulling back a whopping 40% from the all-time highs. A lot of damage has already been done. I generally agree with Cembalest’s assessment (I’m less focused on levels versus entry points for our favorite brands) as his conclusion so I’ll just post it here:

“I see no reason why this cycle will not end up looking like most of the other ones. If so, the bottom in equities will occur even as news on profits, GDP and payrolls continues to get worse. When will that be? We will be watching the ISM manufacturing survey very closely. It has a good track record of roughly coinciding with equity market bottoms, as shown in the table. I would consider 3200-3300 on the S&P 500 index good value for long term investors, if such levels were reached sometime this fall/winter.”

In this example: We do not know if markets have yet to make their final bottom but there’s already been major damage to sentiment and equity prices. Valuations have been re-set. Earnings began to ease in Q1 of this year, payrolls have not begun to fall but with layoff announcements, we should see that next. GDP peaked about the same time as earnings.

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Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Update: Consumers & Savings – We Update the Consumption Capacity Factor

Key Points

• COVID-19, a 100-year storm, altered consumer spending habits which are normalizing now.

• Household consumption capacity remains stronger than the markets predicted.

• Holiday shopping trends should be driven by needs, wants, and strong discounting.

“At the current rate of decline (last 3 months), even the lower income groups would have a significant period of time before their savings buffers returned to 2019 levels…at least for now, and for some time to come, consumers appear to have sufficient buffers to weather any storm”. BofA earnings call, November 2022

Broad Consumer Spending is Affected by Many Factors

In my 30 years of investing and tracking consumer trends, I have never witnessed a more complex set of variables to assess consumer health and future spending trends. Covid, and the responses to it, have created a 100-year storm across many facets of the global economy. For investors, making investment decisions based on 100-year storms is generally a very bad idea. Please do not extrapolate recent trends and assume they will continue indefinitely. Consequently, what’s an investor to do? Anchor to timeless concepts is one answer. Let’s analyze consumer spending given it’s a very large phenomenon. Because we are all consumers, we have oodles of data and personal experiences to anchor to. I have said it many times: nothing is more predictable than a consumer’s propensity to spend. As investors though, we must understand HOW consumers will spend during different parts of the cycle.

Example: when our politicians decided to shut down the bulk of a $21 trillion economy, there were bound to be consequences, known and unknown. Our behaviors had to change. We knew we needed to grocery shop and consolidate our shopping trips to fewer stores, and we embraced online shopping like never before. Needs became more important than wants. Our homes were our safe place. We realized we needed to do some work on our homes to make them 24/7 ready. Understanding this progression led to some wildly profitable investments in the primary beneficiaries of that pivot to spending. Let’s unpack what we see today for consumer spending.

At the peak of COVID, all locked in our homes and unable to spend & travel like we are accustomed to, our savings ballooned. We spent less, concentrated our spending more, and most consumers received additional payments from the government for staying at home. With a few clicks of a mouse, we ordered what we wanted and needed online, given we had a significant amount of excess savings. Some used the opportunity to retire early, some began working from home which required home improvement spending and tech hardware upgrades, and most businesses were forced to pull forward 3-5 years of digital infrastructure upgrades so they could service the 100-year storm of high demand. Fast forward to today and things look different.

New consumer spending habits have emerged, mostly driven by macro uncertainty and higher inflation and its effect on the prices of things we want and need.

We have spent less on goods, and more on services like travel. To be sure, an economy that experienced “over-spending” will eventually experience “spending normalization” which simply means the unsustainable spending will mean revert lower and the abnormal under-spending will mean revert higher. That’s been happening for over a year now and will likely continue for a while longer.

Consumption Capacity & Savings Buffers Still Remain

We know consumers do not have an infinite runway to continue paying-up for almost every product and service they need. Aside from our inability to pay, we just don’t like being taken advantage of. Who enjoys paying so much more for eating out, or grocery shopping, or staying at a hotel that costs 30%+ more than it used to? It’s maddening. The data shows, consumers are already making choices about what they are willing to be over-charged for and what they are willing to defer until prices drop. I expect that trend to continue, which makes the most relevant brands a very important focus for investors today. Recent earnings from luxury goods brands, LVMH and Ferrari, highlight the importance of brand love when prices are high and above normal. If you have the means or have high brand love, you continue spending on the brand. But, if a brand adds little value to you and you can defer the spending, you lower or cut the spending quickly. To be sure, the high inflation we see today has affected the lower income cohorts in a much deeper way than higher income cohorts. But there remain some savings buffers which could keep consumer spending from falling the way markets expect. This chart from Bank of America highlights how many months of savings are locked in their deposit base when using the last 3-month average of spending trends. The chart breaks this down by income cohorts and shows the more money you have in checking/savings, the longer you can dip into those savings if the cost of living remains higher than normal.

The <$50k income groups have an estimated 10-month savings buffer while the high earning cohort of $150-$250k have roughly 40 months of a savings buffer. Obviously, none of us want to pull from savings unless we have to but the doom & gloom surrounding an imminent collapse in consumer spending is clearly misguided. The market loves to over-react and most consumer stocks have significantly under-performed YTD, creating some great buying opportunities as actual business trends do not warrant the drawdowns we’ve seen. The key to unlocking the opportunities is to understand where spending will likely stay strong and to avoid areas where spending could slow further. Here’s the BofA chart, it’s very instructive.

Months for Median Deposit to Return to the Average 2019 Level Given Rate of Decline in the Last Three Months

BofA makes a great point in their recent report that bears repeating:

“Should a harder landing develop, then this run-way will clearly be shorter…at some point, consumers may need to make a bigger course correction in their spending…”

Holiday Shopping: Discounts Everywhere.

Some brands rarely discount because they have the luxury of high brand loyalty which drives pricing power and higher margins. Those brands tend to be great stocks. LVMH, Lululemon, Apple, Tiffany, and Hermes come to mind. Other brands thrive because they are the important low-price options for consumers. Great companies like Costco, TJX, Walmart, Target, Dollar General, and Five Below come to mind. These brands turn over their inventory a lot more than the luxury brands, operate on much lower margins, but do a significant amount of sales volume. These brands have also been solid long-term performers. There will be some massive holiday discounts in the apparel and general merchandise category this year because most companies have very high inventory levels driven by all the supply chain and freight delays. That could keep a lid on these stocks near-term, but it’s great for consumers.

Bottom line: consumers are feeling the pinch of high prices, but there’s more spending runway than people think via excess savings. The sheer amount of savings we started with is simply too large to be drawn down quickly. With a buffer to savings, inflation rolling over slowly, and discounts galore, your holiday shopping should offer you some wonderfully needed discounts!

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Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Lessons From Alternative Asset Managers – Private Equity & Real Assets: Where the Smart Money Invests

Key Points

• The Private Equity industry has seen explosive AUM growth over the last 10 years.

• Private Equity leaders have compounded client capital in strong & weak markets.

• Private markets are more rational than public markets and offer a smoother ride.

“We are fortunate to be able to deploy a significant amount of dry powder with asset prices more dislocated and while capital is quite scarce”. KKR Management on the November 1, 2022 quarterly earnings call.

The Alternative Asset Management Business Has Grown Rapidly

A key mega trend our team is excited about is the migration of assets to alternative asset managers. Within the asset management industry, the alternatives category is growing fast and with significant room to expand. The “smart money,” which includes foundations, endowments, pensions, sovereign wealth funds, and insurance companies, have been investing in private markets for decades and between 20-40% of their total portfolios are still invested in this category today. The high-net-worth and private wealth markets have been much slower to adopt the private markets, but meaningful asset growth has begun while still being only roughly 2-4% of a typical HNW portfolio. Although they should, I do not expect the retail market to begin allocating like the smartest institutions. However, from where we sit today, there is still meaningful growth ahead in this channel. A recent Evercore ISI report shows each incremental 1% allocation from the wealth management platforms would mean $100 billion of additional assets to alternative managers. That’s powerful stuff.

Total funds under management across private markets reached an all-time high of over $10 trillion. Remember, the global equity market is about $111 trillion and the global fixed income market is about $127 trillion. So, the private markets are still a fraction of what the public markets are (data source: sifma.org). The trend is very clear, institutions have continued to increase allocations to private markets at the expense of public markets. Overall, the performance has been better, even with higher fees, the investment strategies are differentiated, and the ride is generally smoother. Here’s a chart from the largest PE firm, Blackstone, that I think will resonate with you. It shows various public and private asset class returns and volatility since 2017 when the Blackstone products were created for the HNW market. Winners are located in the northwest quadrant:

If you have any investments in Blackstone or KKR’s wealth management strategies, you’ve slept a lot better when comparing the daily volatility of equity and bond markets to private markets. The harsh reality is that the public markets have become more of a casino than they ever have. Algo’s and dark pools drive daily volume and short-termism. In addition, “trading” has become rampant. Private investors have the luxury of longer duration, far less volatility in business valuations, the confidence to average down when their investments have been marked lower, and a loathing for panic selling at bargain prices. That’s why private markets have become so important in a portfolio today.

Alternative Asset Managers Have Compounded Capital Strongly

Over the past 20 years, the Yale University Endowment has generated the top total return across all endowments tracked by Pensions & Investments. How did they do it? Smart asset allocation decisions, strong manager selection, and by avoiding short-termism. A key reason for the outperformance is the active decision to lessen their dependence on public securities in favor of adding a significant allocation to private securities. The chart below is a taste of what smart allocators in private markets have offered investors. This slide comes from KKR’s November 1, 2022 earnings presentation.

The best private equity firms simply have an information advantage and they see around corners because they own hundreds of companies and collect real-time data. They have a global opportunity set, the smartest professionals in the industry, and access to large amounts of capital to deploy at opportunistic times. Private Equity stocks are on sale today and the opportunities have never been more robust.

2022 has been a difficult year for public equities and fixed income. The 60/40 portfolio has never had such poor returns. Rates are normalizing after being manipulated by the Federal Reserve for over a decade. The demand for the services these Private Equity firms offer will only go higher.

To illustrate this more clearly, let’s connect a few dots.

1. Do you think institutional money and retail investors will want more or less exposure to private market strategies that are holding up meaningfully better in a very tough year? More is the correct answer.

2. With inflation set to stay elevated for longer and interest rates normalizing with a much higher cost of capital, do you think it gets harder or easier to generate attractive returns? Harder is the right answer. Remember, these PE firms saw this inflation three years ago and they positioned portfolio’s well in advance of rising prices.

3. When the economy slows and markets act irrationally and drive asset values lower, do you think having significant capital ready to deploy at better prices ends with a positive outcome once the dust settles? Yes, is the correct answer.

FYI: Blackstone has $182 billion of dry powder waiting to be deployed. KKR has $113 billion.

Private Markets are More Rational than Public Markets

I’ll go out on a limb and say that sleeping soundly at night, particularly when markets are in turmoil, is something people can appreciate.

When we see the public markets gyrate with massive swings in both directions, one can only assume the second-by-second prices we see on screens are not always realistic. There are margin calls, forced selling for personal reasons, algo-driven parabolic moves, and mind-bending drawdowns. Actual businesses and their “values” simply do not fluctuate like the public markets indicate. To illustrate this, let’s see how Private Equity performed from peak 2007 into the Financial Crisis, how it recovered into 2011, and through the dotcom bubble and subsequent recovery. PE performed much better than their public market peers because they were not forced to sell, and they got more aggressive with buying assets at distressed prices. Sometimes, not seeing your assets priced every day is a very good idea. It is important to note that the stocks of PE firms struggle mightily because they are stocks in a stock market meltdown. However, their actual businesses & the opportunities they eventually capture generate significant forward returns. That’s what I expect for stocks going forward.

To quote a smart hedge fund manager I know, “the best alternative asset managers plant more seeds when things are scary and harvest more crops when things look great.”

Private Markets are More Rational than Public Markets

I know of no other flywheel that’s more robust or that holds better compounding opportunities than the Private Equity and Real Assets model. I’m not sure where markets will bottom, but I am quite confident in the ability of Blackstone and KKR to drive meaningful shareholder value in the future. Here’s the flywheel in a nutshell:

• Top Private Equity firms employ the smartest investors in the world.

• That offers these firms a major competitive advantage.

• Which drives strong asset flows into the firm.

• More assets drive more investments.

• More investments drive more fee revenue and incentive fee revenue.

• These firms have a history of strong returns for clients.

• This drives even more new assets to the firm.

• More assets drive more fee’s which leads to investors working with fewer firms.

• More money going to fewer PE firms drives a widening competitive advantage.

• Happier customers drive deeper relationships which drives even more asset flows.

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Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Lessons From Peter Lynch: Invest In What You Know

Key Points

• Peter Lynch is one of the most successful investors of all time. He ran the Fidelity Magellan Fund.

• Fidelity Magellan was the best performing active fund in the industry under Lynch.

• To generate outsized returns, Lynch advocated embracing volatility & staying invested.

“I’d rather invest in pantyhose versus communication satellites or hotel chains versus fiber optics”

” I love volatility…Take YUM Brands (Taco Bell)… I knew the company was in great shape and market volatility allowed me to buy more shares as it fell from $14 to $7 to $1 per share only to be acquired by Pepsi for $42 a few years later.

Here’s a quick three-minute link to an interview with Peter Lynch where he talks about market volatility: Peter Lynch: “I love volatility”

Peter Lynch…Invest in What you Know.

There are a handful of investors that have risen above everyone else over time. Peter Lynch was one of the titans of investing. Peter ran the Fidelity Magellan Fund from May 1977 to April 1990. Over that period, the Magellan Fund was the top performing equity fund. His “invest in what you know” approach is quite similar to what we preach with the top global brands approach to investing. Many things have changed in markets since Peter’s retirement in 1990, but nothing is more timeless than investing in companies you know, trust, and love and in the products and services you consume on a frequent basis. There’s a lot more research involved than just “investing in what you know”, but this ideal is a great first step in identifying potential strong investment opportunities. Peter preferred businesses that were easy to understand. He constantly stated that individual investors had an advantage over fund managers because they knew what brands were dominant in their local communities. It was like having insider information he used to say. He clearly believed in top brands given the holdings he had over his tenure, a testament to the fortitude of the thematic. He also clearly loved industry leaders as well as interesting turnaround situations. He preferred growth companies that could be bought for reasonable valuations and was keenly focused on important profitability metrics and competitive advantages. We whole-heartedly agree.

There are so many similarities between our approach and his that it’s uncanny. Brands matter as much today as they did when Peter was running Magellan. Brand relevancy changes over time but being the dominant brand in important spending categories tends to lead to very positive investment outcomes over time.

The Magellan Fund Under Peter Lynch’s Direction:

Wow, is all I can say. The Fund was the #1 performing equity fund during Peter’s management. Here’s a chart of the fund versus the S&P 500 over this 13-year period.

Source: Morningstar

Massive, annualized outperformance with similar volatility of returns when compared to the S&P 500. Perhaps there’s something to this “invest in what you know and understand” approach? I’ve looked at a number of holdings during his tenure and it reads like a who’s who of top brands of their time. It’s fun to look at these brands to see how relevant they are today or if they have become parts of other highly relevant brands. The great returns were generated through investing in some iconic brands like: Toys R Us, Taco Bell, La Quinta Resorts, Cracker Barrel, Home Depot, Albertson’s Fed-Ex, Coca-Cola, Ford, Chrysler, Pep Boys, McDonalds, Philip Morris, Disney, Delta Airlines, and many others.

Timing the Market is Difficult, Stay Invested & Add on Dips

There have been many stories written about the success of Peter’s approach and his track record at Magellan. What few people talk about is the path that investors had to follow to receive those returns. Like today, there was plenty of market volatility and frequent drawdowns, yet Peter somehow compounded people’s capital at a very high rate. The trick he said, is to use volatility to your advantage and stay invested for the long-term. In theory that is easy, in practice, it is difficult and requires fortitude and conviction. When stocks are volatile and have drawdowns, like today, the emotional response is to get to the safety of cash because we extrapolate the short-term direction of stocks well into the future.

We tend to do that after a big drawdown has already occurred and typically closer to the bottom in stock prices. Every economic situation is different, but the results seem to be the same: we love holding stocks when markets are calm and stocks are going up and we extrapolate disaster when markets are volatile and the media is painting a bleak picture. This forces us to make irrational, emotional decisions that run counter to our long-term goals. Let me be very clear, when great businesses go on mega-sale, you buy more. So long as the big picture of the business hasn’t changed much, the weakness should be bought.

There is always renewed demand for great brands when they go on sale. Use that knowledge in times like today when some of the greatest businesses the world has ever seen are 20-50% off their recent highs. As you’ve seen from my former blogs, implementing a systematic cost averaging strategy can add significant value around the core position and helps you recover quicker over time. Here’s that recent blog if you haven’t read it: Cost Averaging Adds Significant Value

Being a long-term investor means you will occasionally see some drawdowns. Some are just shallow pullbacks in a bull market, some are more event-driven corrections, and some are inflation and interest rate driven bear markets like we have today. I analyzed Magellan Fund returns while Lynch managed the fund and below are the number of times the fund saw different types of pullbacks.

Data source: Accuvest & Magellan returns via Ycharts

That’s a lot of pullbacks over a 13-year period and if your emotions got the better of you, you lost the ability to generate the returns many of the great brands of yesteryear generated.

“If you can’t banish forever the fatal thought “when I’m down 25%, I’m a seller, you’ll never make a decent profit in stocks” said Lynch in his book, “One Up On Wall Street.”

Peter Lynch had many famous quotes but this is another one of my favorites: “when the market went down, so did the fund, most of the time it went down more than the market, it’s just that simple…expect it.” The graph from Morningstar highlights this fact. The blue line is the Magellan Fund and the green line is the S&P 500. Typically, when markets went lower, the fund also went lower, and it lost more value than the index during those drawdowns.

In the end though, the fund that was driven by one of the greatest investors of all time using a simple, common-sense approach of “investing in what you know”, somehow managed to go on to reach new all-time highs again and again. From a top brands perspective, I have seen this same movie happen over and over for the last 30 years and I expect the same to be true going forward. Great companies that dominate their industries find new ways to win over time. That’s what makes them great brands.

There’s always going to be something to worry about, but remember Peter Lynch’s words:

“Buy great businesses, embrace volatility, be willing to buy more of what you completely understand, and stay invested for the long-term.” This simple process will serve you well during your investment career.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

The Last “Lost Decade” Favored Top Brands

Key Points

• The calls for another “lost decade” in stocks are getting louder.

• A historical look-back from the last “lost decade”, 2000-2010, shows brands mattered.

• A brand’s relevancy is vital to a company’s success. Brand relevancy changes over time.

“In good times, brands matter. In difficult times, brands really matter”

Predicting the Future is Difficult

Absolutely no one knows what will happen in the future. When you come across a person or firm that says they can predict the future, ask yourself why they aren’t sitting on a 100-foot yacht in St. Barts versus talking to the media or you about their knowledge of the future. The future is un-knowable because variable always change. Even the most well-thought-out macro view that connects the dots from one factor to another to arrive at an end-projection requires every dot to jive with the others. One breakdown in the macro dot-plot changes every other prediction making the entire prediction less likely. So why try to predict the future at all? Attention is the answer.

The world likes to hear from “smart forecasters” in times of high uncertainty. Not having any ideas about the future is a control-freak’s worst nightmare so these “experts” try to gain attention and to make money catering to your fears.

Here’s a key truth: success in the stock market is more about keeping your emotions in check than actually picking the right stocks. Great companies just win over time; there’s ample evidence of this, along with it being common sense. When investors finally can’t take the volatility and drawdowns anymore, they tend to make the absolute wrong decision at the wrong time. I’ve seen this movie play out over and over in my 30 years of investing. Just remember, buying great companies when they go on big sales is what one is supposed to be doing, not panic selling. Here’s a recent blog talking about that where I show real world examples of the gains that could have been generated if ones emotions were in check: https://catalyst-insights.com/analysis-cost-averaging-adds-significant-value/

As you are well aware, there’s plenty of uncertainty and lots of forecasting going on today. Some very smart, very successful investors have recently been predicting a potential “lost decade” in stocks going forward, Jeremy Grantham (GMO) and Stan Druckenmiller to name a few. We will not comment on the future because it’s un-knowable and therefore a waste of time to try forecasting it. What we do know: human beings earn money, save money, and spend money. Our brand loyalty or brand loathing tends to drive how and where we spend our money. The same is true at the corporate level, it’s less about the emotional connection though, and more about corporate innovation & finding productivity gains. That’s why our team created the Brands 200 Index and why we run an actively managed equity strategy based on B2C and B2B consumption. In good times and bad, consumption is happening. It changes in size and scope according to different parts of the business cycle but the companies that are driving innovation and delighting customers always win in the end.

In great economic environments even average companies perform well, but in more challenging times, arguably like today and potentially in the next few years, only the best companies even have an opportunity to thrive. We have confidence that the most relevant and admired brands serving consumers and businesses will do what they have always done: survive and thrive.

History as a Guide: 2000-2010

As Jim Cramer likes to say, “there’s always a bull market somewhere.” With that thesis in mind, let’s look at the last “lost decade” in stocks, which was 12/31/99 to 12/31/09. Here are some facts:

Lost decades tend to happen when the prior decade was abnormally positive and likely unsustainable.

The 10-year period from 12/31/89 to 12/31/99 saw the S&P 500 Index annualize at about +18.1% versus the normal, long-term average of +9-11%. Based on that statistic alone, one might expect the next decade to be something closer to normal or less than normal. As it turned out, the 10-year period from 12/31/99 to 12/31/09 saw the S&P 500 Index annualize at about -0.95%. (Source: Ycharts.com)

The 2000’s was not a great decade for the market overall. In keeping with this wide lens return thesis, the secular bull market that began March 9, 2009 until the recent highs on November 20, 2021 was also much better than average at an annualized +18.8% return for the S&P 500. The growth stocks from the Nasdaq Index performed even better. Based simply on this historical performance look-back, one could assume the next 10 years might be lower than what we are used to. In fact, as policy rates are normalizing, we should indeed expect more volatility and potentially lower returns than we are used to, at least while the normalization process is happening. In the end though, a world without zero interest rate policy and free money is a very positive development for markets and stocks.

Let’s go back to the 2000-2010 lost decade period and show how a hindsight-focused top global brands basket performed versus the market. It was a tough early part of the decade for tech brands and many other consumer stocks, but overall, an iconic brands basket performed admirably in a tough decade. This all occurred while brands like Apple, Amazon, Microsoft, Disney, American Express, Home Depot, Este Lauder, Coke, and Schwab were down a minimum of 35% of that period. Already I sense the current period is rhyming with yesteryear. As you can see from the Ycharts image below, the 43-stock portfolio, equally-weighted annualized around the long-term average for the lost decade as the overall market struggled. The best companies tend to do much better than peers in the worst of times. They have the brand awareness, the balance sheet, the free-cash flow to invest through the cycle, and they often have the best operating metrics. And all this when we had the Internet bubble bursting, a recession, the 9/11 terrorist attacks, and then the great financial crisis and housing bust of 2008/2007. It’s pretty impressive that a group of companies, let’s call them top brands, somehow found a way to perform over a wild decade with two very bad recessions. Here’s the actual performance of the brands basket and the S&P 500 during the lost decade.

Brand Relevancy Matters Today As Much Or More Than It Did In 2000

As I write this week’s commentary, some of the most admired, most profitable companies (brands) have fallen 30-60% in less than one year. That is a very rare occurrence. You can thank your politicians and the Federal Reserve for this ugly year of returns. Multiples have come back to earth and estimates have been reduced with likely a bit more reductions to come as the effects of high inflation work their way through corporate earnings. If you read last week’s blog, you saw the chart of the 1973/1974 bear market with similar issues as we have today. The market ultimately bottomed as earnings were peaking. That’s counter-intuitive for sure and there’s no way to know if the same will occur this time around but the message from that blog was: markets don’t discount a recession twice. The poor market we have today is in the process of discounting a lot of bad news and stocks will likely bottom well in advance of your fear of these news items. Here’s the link to last week’s blog: https://catalyst-insights.com/where-will-stocks-bottom/

The discounts on great businesses we have today makes investing in the most admired brands a lay-up for investors with a little time. Aside from that observation, let’s get back to a period of difficulty like the 2000’s decade. When looking at the performance chart above, clearly something worked in the last lost decade.

Here’s a few observations from the chart and the holdings in the brands hypothetical portfolio:

• The brand leaders of this period seemed well positioned from a business perspective.

• The highest quality companies always invest through difficult times because they can.

• Investing for market share when peers are re-trenching tends to drive future gains.

• Being balanced between offense and defensive business models seemed to work well.

• Bubble stocks tended to lag when the bubble popped and valuations mattered again.

Here’s a look at the hypothetical “most relevant brands” basket that performed so well:

Let’s call that the “sleep well at night” portfolio!

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Analysis: Cost Averaging Adds Significant Value

Key Points

• Core strategies are designed to track core mega trends around the world.

• Industry leading brands serving important consumption industries win over time.

• Cost averaging into a basket of brand leaders can add significant additional value.

Brands: The Ideal Core Equity Decision

In last week’s blog, I highlighted the positive long-term track records of a handful of the most admired brands to show how important the consumption thematic is for investors. I also showed the corrections that happen along the way as a reminder that stocks do not always go straight up, nor does a basket of stocks always outperform. Over the long-term, however, the data is very clear. The Consumer Discretionary & Tech sectors have a very strong track record versus the overall market as measured by the S&P 500. Today, it’s important to widen the lens as the Consumer Discretionary & Tech sectors struggle with rising rates and a difficult macro environment. The important point, however, is to not get shaken out of owning great companies when they are underperforming. If you loved these companies and sectors when they were outperforming, you should love them even more now that they are experiencing a rare period of underperformance.

The definition of “core” is the “central” or most important part of something. As a U.S. investor, one of the core parts of our economy is the consumer and household/business consumption. This important component accounts for ~70% of U.S. GDP. To track the beneficiaries of a consumption led economy, the ideal proxies are the leading brands serving this $14 trillion a year thematic. There is no other thematic bigger or more important than consumption. Do you have a consumption-focused core allocation? If so, good news: the leading brands, these key leaders of industry, are on sale. So now is an opportune time to start building positions in these well-positioned businesses. Many of these highly admired brands are trading at levels not seen for many years and their operating metrics are much better than the stock action might indicate.

Track Records Matter. Brands Matter.

For perspective, I have posted a 30-year look-back of the performance of some of the most important consumption brand leaders across key spending industries. When a brand stays highly relevant and continues to dominate its industry, big weakness in its stock has historically been a gift for investors. As you can see from the chart below, there’s some wonderful excess returns to be had if you understand how to identify brand relevancy and hold a core basket of brand leaders. Most importantly, investors only received these stellar long-term returns if they were committed to holding them through good times and bad. I’m sure you’ve seen the Morningstar studies of long-term returns versus the actual returns received by investors. The actual returns tended to be considerably lower because investors tended to panic sell in volatile market conditions like what we are seeing today versus adding to positions when they go on sale.

Data source: Ycharts.com

What I find most interesting about the chart above is the strong excess returns that were generated even through very difficult market environments. Over the last 30 years, we’ve had to endure multiple recessions, bear markets, flash crashes, 9/11, multiple Fed-induced taper tantrums, the European debt crisis, the 2020 Coronavirus, and today’s current high inflationary environment. I can guarantee there will be more turmoil in the future, it’s simply the nature of markets. When you’re sitting in the middle of the hurricane, it always feels like the world and markets will never recover and yet they always have.

Cost Averaging into Additional Shares of Core Holdings Adds Even More Value Over Time.

Having a strong buy-and-hold mentality regarding leading companies has served investors well over the long-term. Remember, the equity markets deliver positive returns roughly 80% of the time. It’s the periods when market leaders are underperforming that offer the best additional long-term opportunities. Catching the absolute bottom is less important than having a systematic approach to adding to great brands, funds, and ETF’s when they are experiencing periods of weakness. Being committed to adding capital during deep corrections has helped to speed up the ultimate recovery time. To illustrate this, I will use two key brands serving the important spending category of restaurants and fast casual dining. The same results would have occurred if I used other leading brands for this analysis. It wouldn’t have mattered if it was Home Depot, Lowes, Lululemon, Nike, Apple, Amazon, Costco, or Estee Lauder. The results were all the same.

Exhibit 1: Chipotle Mexican Grill, CMG

Investing a hypothetical $100k in your favorite burrito brand after their IPO on 1/31/2006 would have turned into a cool $3.6 million by mid-September 2022. Over the same period of time, an investment in the S&P 500 with the same $100k netted an investor ~$431k. I think you would prefer the $3.6M over the $431k!

Cost Average Benefits:

Using this hypothetical example, let’s see if adding to your core position in CMG would have added value to the end result. Let’s say you systematically invested an additional $10k in CMG stock when it was down 25% from the last 12 month high or from the most recent cost average buy level. In the image above, the additional $10k investments when the stock was on sale are noted as blue dots. It’s important to note that you did not have to time the bottom perfectly to receive a huge additional benefit.

The result from this hypothetical is that you would have invested an additional $10k seven times since 2006. This would be worth an additional roughly $284,000 net of the $70k initial investment. Since 2006, your vote of confidence in Chipotle with the core $100k investment and the additional $70k cost average investment would be worth roughly $3.9 million, much better than an investment in the S&P 500.

Exhibit 2: Starbucks, SBUX

Investing a hypothetical $100k in your favorite coffee house brand 30 years ago would have turned into roughly $23.7 million by mid-September 2022. Over the same period of time, an investment in the S&P 500 with the same $100k netted an investor ~$1.6 million. I think you would prefer the $23M over the $1.6M!

SUMMARY:

Thematic investing is a commonsense decision. Global consumption and business investment is a roughly $44 trillion a year thematic. That makes this an ideal core allocation given the definition of core. Identifying the dominant brands in consumption categories and holding them so long as they stay relevant is another logical decision. Adding to these great companies when they experience normal corrections can add even more value to the portfolio over the long-term. If you know how the movie ends (brands tend to outperform over time), being savvy and cost averaging into great businesses when they are on sale, has shown to be a very smart decision. Warren Buffett likes to say, “volatility is the friend of the long-term investor”. We agree whole heartedly and are excited to invest in great brands when the market puts them on sale.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

The Chipotle hypothetical cost averaging example highlights the potential power of holding core positions in industry leading brands and being committed to adding to these positions when the market acts irrationally. Cost averaging leading companies can add significant value to your long-term portfolio even if you do not catch the absolute bottom in the stock. Details on this hypothetical are below.