Trends That End

Adam M. Grossman

CONGRATULATIONS ARE in order for Jay and Kateri Schwandt, a Michigan couple who recently welcomed a new baby girl. This might not seem like an event that’s worthy of national news, except this is the Schwandt’s 15th child—and the first 14 are all boys. In an interview, Jay Schwandt said he didn’t think a girl was even possible: “You know after 14 boys, we just assumed perhaps medically it just wasn’t meant to be.”

The Schwandt’s new baby illustrates a point that’s often debated in the world of personal finance: When you see a pattern, especially one that’s been repeating for a very long time, is it safe to assume that it will continue indefinitely?

An example: The U.S. stock market has risen by 10% a year, on average, for nearly 100 years. Is it safe to assume this will continue? The simple answer is “yes”—or “yes, probably.” Despite the dysfunction in Washington, we continue to lead in technology and innovation. Ultimately, this helps drive the stock market. That would be the simple answer.

But it would also be easy to make the counterargument: The U.S. population is growing much more slowly today than it did in the past, and population growth is a key ingredient for economic growth. We also have unprecedented levels of federal debt. Some believe those factors will combine to slow future growth.

Personally, I’m in the first camp: I believe the U.S. will continue to grow and innovate, and I believe this will be positive for the stock market. But patterns do reverse—even longstanding patterns. This year has witnessed several such reversals:

  • Warren Buffett likes to say that his favorite holding period for a stock is “forever.” But in a recent regulatory filing, his firm, Berkshire Hathaway, revealed that it had sold nearly half its stake in Wells Fargo after a series of scandals tarnished the bank’s reputation. Wells Fargo had previously been one of Berkshire’s “Big Four” investments—a company Buffett had praised for decades. For a while, in fact, Berkshire was Wells Fargo’s biggest shareholder. But then things changed at the bank. As a result, despite his long history with the company and his “forever” philosophy, Buffett walked away.
  • Over the summer, the Federal Reserve upended decades of policy when it overhauled a document some refer to as the Fed’s constitution.
  • For years, value stocks have underperformed growth stocks. Multiple articles and essays in recent years have carried the headline, “Is Value Dead?” But after years of lagging, value stocks—and especially small value stocks—have suddenly caught fire, easily outperforming their more popular growth stock peers.

Look back further into investment history and there are many similar cases. In the 1960s, the so-called Nifty Fifty stocks were called “one decision” stocks, because it was believed that investors needed to make just one decision—to buy them—and thereafter would never need to sell. But by the early 1970s, sentiment shifted and, as a group, the Nifty Fifty lost more than 80% of their value.

More recently, crude oil prices—and, along with them, the stocks of energy companies—have seen a similar collapse. For a long time, people believed that the world might run out of oil, a theory known as “peak oil.” This led to a dramatic runup in oil prices. Just before the recession hit in 2008, the price for a barrel of crude oil topped $140. But then suddenly the market changed. Today, the concept of “peak oil” has been discarded and a barrel of crude is barely above $40.

Time after time, there have been trends in the investment world that looked like they might continue more or less indefinitely. But then something happens, causing the trend to break down or even reverse.

The difficult thing as an investor: It’s so easy to build an argument to support practically any view of the future. On any given question, reasonable people differ, but no one truly knows how things will turn out. Where does this leave you? How should you proceed in the absence of a crystal ball?

As a starting point, I’d adopt the mindset that Amazon founder Jeff Bezos exhibited in a talk a few years ago, when he acknowledged that nothing lasts forever. “I predict one day Amazon will fail,” he said. “Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.”

Perhaps that explains why Bezos has sold more than $10 billion of Amazon shares this year and has a plan in place to regularly sell further shares. I’m sure he isn’t worried about Amazon’s near-term outlook. But it’s not inconsistent to also acknowledge that things could change. This sort of balanced view is, I think, exactly the right way to look at any investment.

My second recommendation: Take others’ opinions with a grain of salt. Recognize how easy it is to build a story about the future. Also recognize that Wall Street analysts get paid to make predictions and to sound authoritative when delivering them on TV.

I’d be especially wary of extreme predictions. You may recall that, a few weeks back, I talked about investment legend Jeremy Grantham, who is advising investors to get out of the U.S. stock market. In the end, he might be right or he might be wrong, but his prescription strikes me as extreme. I don’t question Grantham’s wisdom or his experience, but I’d be cautious of any recommendation that doesn’t sound balanced.

I’d also be especially wary of recommendations that sound alarmist. We’ve seen this repeatedly around elections. When each of the last three presidents was elected, those who weren’t the biggest fans of the new president were quick to predict a negative outcome for the economy. But instead, the market went up under President Obama, it went up under President Trump, and it’s been going up in the three or so weeks since the most recent election. People who predict doom often garner headlines—but they’re rarely right.

Simple as it sounds, I believe the best route to investment success is to build a logically diversified portfolio and to avoid making too many changes in response to recent performance, economic data, stories, predictions and opinions—especially political opinions. I don’t pretend that this is easy. It can be difficult to build a portfolio that includes investments and asset classes that have been lagging, especially if they’ve been lagging for a long time. But as we’ve seen this year and throughout history, trends can reverse. Just ask the Schwandts.

Adam M. Grossman’s previous articles include Getting PersonalSweat the Big Stuff and Emerging Concerns. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.

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