January Market Insight
Markets are off to a lousy start in 2016. A down market is when you need good advice the most.
The following quote comes from the Intrepid Endurance fund’s 4th quarter commentary:
Amazon and Netflix were the S&P 500’s two best performing stocks in 2015, up 118% and 134%, respectively. Most people love these services, and this adulation has transferred to their stock prices. Amazon and Netflix are disrupting their respective industries by offering more for less, and they are partly able to do so because shareholders have not yet demanded a profit from them. Four S&P tech stocks—Facebook, Amazon, Netflix, and Google (the “FANGs”)—accounted for $450 billion of growth in market cap in 2015, while the 496 other stocks in the S&P collectively lost $938 billion in capitalization. Amazon’s market capitalization is $317 billion, which is bigger than the combined market values of Walmart, Target, and Costco. These three old economy retailers reported trailing twelve month GAAP net income of nearly $17 billion, while Amazon’s net income was $328 million.
Perhaps you watched some of the AFC championship game between the New England Patriots and the Denver Broncos. The Patriots, with their very successful and highly touted offense, were favored in Las Vegas to win the game, even though they were on the road playing a team they had already lost to this year. After all, who wants to bet against Tom Brady? But as the game unfolded, it was Denver’s defense, not the Patriots offense that dominated the game. Brady was consistently under attack and had no time to find receivers or move the ball down the field. The Broncos are now in the Super Bowl and the Patriots are on the beach.
Defense is equally important when investing. Avoiding the truly expensive (and very popular) stocks of today may mean some temporary pain while those stocks fly high—as the FANG stocks did in 2015. But ultimately, it’s one of the best ways to improve your performance over time. Warren Buffet has famously said, “Only when the tide goes out do you discover who’s been swimming naked.” One of the best ways to play defense with investing is to avoid stocks with prices that have been disconnected from the actual business results.
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Here is an update of major market returns for the month of January, 2016:
MSCI World ex USA (international stocks)
S&P 500 (US large cap)
Russell 2000 (US small cap)
Barclays US Aggregate Bond