Clark & Lauren: Investor Profiles
Let’s profile two hypothetical investors. See below:
(The following uses more investment-specific examples than I typically provide — This is not an endorsement of any investment or strategy. It’s simply an educational format to highlight some general points.)
Investor #1: Clark Shmuckerberg
Investor #2: Lauren Tuffett
Lessons to Learn…
This is a profile of two investors and, more importantly, two companies I’ve cherry-picked to highlight a divergence which I think is relevant in today’s environment. That divergence: the potential for earnings, valuation, profit, and competitive advantage to matter more than it has in recent years.
In financial speak, we call this the value premium, or the higher expected return of value stocks (like BRK.B) over growth stocks (like FB).
Below is a chart of showing the years when Value beat Growth and vice versa since 1927.
Source: Dimensional Fund Advisors. (link)
I must note that the last decade has seen some of the most dramatic underpeformance ever recorded by value stocks compared to growth. Most recently, you can look to 2020’s sharp, 38.49% return of growth stocks and the paltry 2.80% for value stocks in the same year.
So, what does all of this mean? Well, here are some takeaways I’d encourage you to consider:
1) Nothing always works. You could see the above chart in early 2020 and say to yourself “there sure are a lot of years where value stocks outperform growth stocks (the years with green bars), I’m going to invest in those companies!” and then see your prediction fall flat when growth stocks posted their best year ever in 2020. If only it were as simple as picking the thing that always does well.
(If you end up finding “that thing”, please be sure to let me know.)
2) If you want to pursue a theme (value or growth), individual stocks are a very difficult way to do that. One company can go under for many unique reasons. Two companies can still go under but it’s less likely. Three companies is even more unlikely, etc. etc. etc. I feel the best way to pursue a given theme is to buy a low-cost diversified fund which screens stocks for the qualities you’re looking for.
For reference, as of today the S&P 500 Value ETF (symbol SPYV) is down 2.64% YTD. The diversified value fund isn’t doing as well as Berkshire Hathaway (up 5.11% YTD).
The S&P 500 Growth ETF (symbol SPYG) is down 11.88% YTD. The diversified growth fund isn’t doing as poorly as Meta Platforms (down 35.28% YTD).
Simply put, I don’t really agree with Clark Smuckerberg or Lauren Tuffett’s single-stock concentration approach and would rather track a basket of companies which highlight the themes we want to pursue.
*This is not an endorsement of the above funds. They’re simply index funds which help highlight the point I’m making here.
3) Do what makes sense to you. Investment strategies can be hard to stick with, so having a strong conviction in what you’re doing is important. Since we know that nothing always works best, we need to know we can stick with our approach through the difficult periods when it’s not working…. Even though I don’t condone Clark Shmuckerberg’s single-stock strategy, the worst thing he can do is panic and abandon his long term approach at the wrong time.
Find a narrative you believe in (one that supports your purpose for investing) and commit to it. If you need help finding that narrative, then it may be time to talk with your advisor.
That’s all for this week.
Onward,
Adam Harding
adam@hardingwealth.com
Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
