Congratulations are in order for Jay and Kateri Schwandt, a Michigan couple who recently welcomed a new baby girl. This might not sound notable except that this is the Schwandt’s fifteenth child—and all of their first fourteen children are boys. In an interview, Jay Schwandt commented that 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 is 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 a hundred years. Is it safe to assume it will continue to do so?
The simple answer is yes—or yes, probably. Despite the dysfunction in Washington, we continue to lead in technology and innovation. And ultimately, this helps drive the stock market. That would be the simple answer.
But it would also be easy to make the counter-argument: 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, in fact, 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 Bank after a series of scandals tarnished its reputation. Wells Fargo had previously been one of Berkshire’s “Big Four” investments—a company Buffett had praised for decades. For a period, in fact, Berkshire was Wells Fargo’s biggest shareholder. But then things changed at the bank. And as a result, despite his long history with the company and “forever” philosophy, Buffett walked away.
- Over the summer, the Federal Reserve upended decades of policy when it overhauled a document some refer to as its constitution.
- For years, value stocks have underperformed growth stocks, to the point that 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 only one decision—to buy them—and would never need to sell them. But by the early 1970s, sentiment shifted, and as a group, they 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 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.
There are many similar cases. Time after time in the investment world, trends look like they might reliably continue more or less indefinitely. But then something happens, causing the trend to break down, or even reverse.
The difficult thing as an investor is that 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. So 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 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 a hundred-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 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. And also recognize that Wall Street analysts get paid to make predictions and to sound authoritative when delivering them on TV. So be wary of predictions, especially when they sound extreme. You may recall that a few weeks back, I talked about an investment legend named 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. To be sure, I don’t question Grantham’s wisdom or his experience, but I would be cautious of any recommendation that doesn’t sound balanced.
I’d 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 are 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 while. But as we’ve seen this year, and throughout history, trends can reverse. Just ask the Schwandts.