2020 in Hindsight
Updated: Jan 30, 2021
They say hindsight is 2020. In hindsight we had a strong 2020: Gold, Silver and Bronze Founders Shares returned 61%, 57%, and 52% after fees. We also learned valuable lessons for the future. Three lessons learned from an eventful 2020:
#1 Stability breeds instability (Hyman Minsky)
2020 began with the unemployment rate at its lowest in 50 years, and witnessed the unemployment rate rise to its highest in 50+ years:
Source: Federal Reserve
Record low unemployment is like a barometer approaching record low. No matter how sunny politicians or media portray the economy, a tempest is brewing. Our models showed investors too manic and manufacturing dropped- this was lightning and thunder. Signs of extreme stability - ie record low unemployment - portend market instability.
#2 Be fearful when others are greedy, and be greedy when others are fearful. (Warren Buffett)
I was surprised the markets reversed so quickly in March, and we remained defensive a couple of months beyond the market bottom. In this manner, we were appropriately fearful when others were greedy but retained our fear a bit beyond when markets were most fearful.
Want a trade that on average returns in excess of the average return for the S&P 500? Buy after the market drops 30%.
Percent Decline in S&P 500 and Subsequent Returns
Source: Michael Batnick
$100 invested in the S&P 500 on March 20 2020 when the market dropped 30% from its high is worth $156 today.
2020 demonstrated that it's difficult but profitable to be greedy when others are fearful.
#3 Markets are like a voting booth in the short-term, and like a scale in the long-term. (Benjamin Graham)
In the long-term markets are like a scale meaning stock prices generally reflect company earnings.
At present there is an imbalance between prices and earnings with investors paying premium prices for companies with depressed earnings. Increased earnings post-COVID will help alleviate this imbalance. However given the magnitude with which markets are presently overvalued, stock returns over the next decade will likely be below average.
This imbalance between stock prices and earnings exists because in the short-term markets are like a voting booth meaning that in the short-term markets are very susceptible to emotion and psychology.
Today there are pockets of mania. For example, Tesla’s market capitalization is greater than the nine largest car manufacturers in the world combined, and Elon Musk recently tweeted that he offered Tesla to Apple for 1/10th its present value in 2017. Both suggest that Tesla is overvalued (although we are not short Tesla). While there may be pockets of mania, we do not feel there is excessive mania in the S&P 500 as a whole yet. Returns over the next decade may lag, but we appear in a bull market at present.
This report reflects the current opinion of the author. The report is based upon sources believed to be accurate and reliable. Opinions and statements about the future expressed in the report are subject to change without notice. The report is not a solicitation or an offer to buy or sell any security.