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Stock market warnings are plentiful.  We receive emails weekly sharing with us articles discussing the trouble that is approaching.  The most recent had a catchy headline – something about a tried and true market signal flashing red – I would have clicked on it too. Most articles are an echo of the previous and point to sluggish growth, uncertain political environment, and valuations as reasons for concern – all legitimate discussion points.  We wanted to touch on two thoughts the latest article triggered to hopefully provide a different and helpful perspective focused less on fear and more on common sense.

First, if you are in the camp that thinks expected returns are next to nothing, what are you doing about it?  Our response to this logic can be pictured in the chart from Longboard Capital below illustrating the distribution of returns for U.S. Stocks.  Is the expected returns for the stock market overall lower than what it was a few years ago? Probably so, I’ll buy that.  But… I am willing to bet there’s a number of stocks (20% or so of the market) that will deliver incredible returns to their investors.  The best part about the stock market is knowing you don’t have to own all of those big winners, you just need a few.  As I touched on HERE and repeatedly discuss in the office, the size of your wins relative to losses is what matters to generate wealth in the market.  Ian Cassel sums up that point better than I can:

“Many of the best investors ever, a handful of investments made up a bulk of their gains. You only have to make a few great decisions.”

For this reason, we believe it’s critical to have exposure to strategies or managers that offer concentration with supporting evidence.   Seeking to benefit from a few of the needle movers that will inevitably be out there is the objective.  Lower expected returns increases the importance of this idea.  Investors need growth, and there will be pockets of the market that deliver an abundance – it’s just a matter of participating.

Secondly, don’t miss right tail events while trying to avoid left tail events.  That behavior works directly against the objective to win bigger than you lose   Human nature to cut winners and hold losers is a behavioral topic I’ll save for another post.  If you exit the market or are holding a large cash position, make sure that it’s supported by price action.  At the risk of sounding like a pure technician, valuations and any other metrics that point to meager returns moving forward, are not what makes or loses you money – price does.  Sell when price tells you to, not when you anticipate the arrival of the top.

Investment decisions should be driven by evidence, not emotion.   The market is your friend over the long term, let it be.  Please read this which expands that thought:  Understand your Real Risk .  For any investment behavior, we advocate rules over discretion and most importantly, simple over complex.

Chart below is from Longboard Capital: