Market Commentary 6/30/2020

By: Matt Garrott

Not including dividends, the S&P 500 was down exactly 20% in the first quarter.  It was up 19.95% in the second quarter.  Down 20%, up 20%.  If you think 2020 has been a joke of a year so far, it seems the stock market is in on it. 

This is a time where you will see dumb people getting rich.  The media loves stories about college kids running hedge funds out of their dorm rooms or ‘Davey Day Trader’.  Remember this is media, not journalism.   A similar experience happens at social gatherings.  I wear a mask to protect against spreading illness, but there’s nothing to protect against people who discovered the Robin Hood app (basically a brokerage account where you can trade fractions of shares) and want to brag about how good they are.  The Robin Hood trader may hit a home run and turn $500 into $2,000.  Great, but that’s not wealth.  If it were typical of the portfolio’s investment results, they would be telling me about this from their private island.  More than likely, the trading activity is a net negative, but represents such a small portion of the portfolio that it is negligible.  For them, the risk of underperformance is worth the chance to talk up the wins (even if they are just playing the penny slots).

Does it feel like the market has just been going up for the last three months?  Do you regret missing the rally?  Good news:  The S&P 500 (or FAANG stocks or NASDAQ) is not the entire stock market.  Small caps, Mid caps, International, and Real Estate are all still down around 10% year-to-date.  While the talking heads on CNBC talk about how the end of March was an obvious buying opportunity, no one is talking about the markets that are still down today. 

None of this matters to diversified investors whose financial plan includes regular rebalancing.  They do not need to “call the bottom”.  They likely did some buying in March if they followed their process.    

Strong long-term performance comes from consistent above-average performance.  It doesn’t require shooting the lights out every quarter.  It doesn’t require timing or getting lucky (although luck helps).  Just follow the process.  A boring, average-feeling portfolio in the short run leads to astounding results as successes compound. 

Succeeding in the short-term requires a specific set of skills plus gobs of luck.  Success over the long-term requires less skill, less luck, but more patience.  Now is a good time to remember Howard Marks’ “Route to Performance”.  The S&P 500 Index, for example, generally isn’t in top quartile year to year, but tends to rank higher over a longer time frame.  You’re always going to have a friend who hit a home run with Apple or Facebook or Bitcoin or Malaysian Sunflower futures, but their process isn’t repeatable over a time period long enough to hit their financial goals.  A diversified portfolio builds wealth, not drama.