Time Heals All Equity Wounds
Stocks dominate the alternatives.
Long-term on average a diversified basket of stocks outperform bonds and cash. And it doesn’t take that long. Historically, just give them about a decade for the noise to quiet and the signal to emerge that stocks are superior for the long run. Other statistical factors such as volatility further favor stocks over time.
It makes sense. Owners make the rules. Ownership is overcompensated compared with lending and saving. It is strongly favored by the tax code. It is the best way to compound generational wealth. Besides an emergency fund and enough cash to fully participate in opportunities that pop up from time to time such as deeply discounted equity offerings, I’m personally all in.
This is my robust, confident, consistent view despite the high likelihood that the timing of repeating it now is horrible. If I have edgy, actionable firm-level ideas long or short, I’ll act on them. But if and when I don’t my own money’s default alternative will always be the S&P 500. I don’t need small caps — they are a small part of the market and mostly correlated with larger more liquid companies. I don’t need international exposure — the S&P 500 is international exposure in that US corporations serve the world. I don’t need bonds — stock winners pay for stock losers but epic corporate disasters such as frauds tend to obliterate the entire capital structure and it is extraordinarily hard to make up for bond zeros with other bonds yielding a few percent each year.
The 20th century was the American century. So my caveat is that was a sample size of one. There are 195 countries in the world and the US generated the most wealth in the 20th century of any of them. There has been half a millennium of stocks and the 20th was the best century for owning equities. So the best country in the best century for buying and holding stocks was great.
But what about now? Now we are in the second American century. Demographically the rest of the developed world is cheaper, but it is a going out of business sale. Countries in a demographic death spiral are closing up shop. Germany, for example, voluntarily shut down its nuclear sector and is choosing to deindustrialize.
Meanwhile a quarter of the way through this century and people around the world want to watch Hollywood movies, use Silicon Valley tech, and send their kids to Harvard or Stanford for school. And this one will cause a lot of discomfort in European capitals — the US is more politically stable. Many of our trading partners are in political upheaval. Meanwhile the US just had an election that was the least racially and demographically polarized in the 21st century. Its outcome was less contested than any other over the same period. Whatever the personal aesthetics and style of the inbound president, his economic policies are quite mild. The new administration could usher in a new era that is far more business- and market-friendly. Few other developed countries can say the same.
So my default allocation is to the S&P 500 for the remainder of this second American century. My favorite way to get S&P 500 exposure isn’t a traditional index fund or SPY ETF — it is direct indexing. You get $250 as a sign up bonus and — far more importantly — they engage in tax-loss harvesting to lower your taxes over time. This is more impactful in some years than others. However, low cost and tax advantaged investing leaves you more money to compound so the impact is geometric. Over a century, the benefit is staggering. Alternative S&P 500 structures lack the flexibility to tax manage at the individual security level.
Tech fans don’t need separate NASDAQ (QQQ) exposure because the S&P sector exposure is almost a third IT.
The top 10 positions are AAPL, NVDA, MSFT, AMZN, META, TSLA, GOOGL, AVGO, GOOG, and BRK.B (whose largest equity exposure is AAPL).
While there has been cyclical mean reversion in past dominant sectors, we’ve never before been in a situation where the biggest businesses are the best businesses. They have little marginal cost or limitation on marginal business prospects. It is hard to see constraining limiting factors to their growth. There are worse asset allocation choices than artificial intelligence and mega cap US tech is the most convenient way to make that bet. If a computer is going to steal your job, make sure that you own or profit from the computer.
I’m working on a small, illiquid, quirky investment alongside a partner who also serves on the board of one of the above companies. We were discussing our next potential project and I offhand asked how things were going in the part of the business that he focuses on as a board member (this sector and market cap might be, for my sins, where I have the least edge and therefore least research focus). His casual answer, approximately from memory, was that they were making tens of billions of dollars per quarter of revenue growing at 25% per quarter with 70% margins. Sure I want to dismiss large liquid and interminably discussed ideas, “in the press = in the price” but the scale that they’re making money is so unprecedented that they just might be as likely to be undervalued as over.
Caveat
Cranky value investors like me hate paying up for stocks with investor sentiment high and the US’ metrics such as PE and PB ratio above our trading partners. There is a very bullish skew to option volume. Money is pouring into US equity ETFs and mutual funds. Even writing down this caveat, it is convincing me… but it would have convinced me the whole time. People are terrible at timing markets. Investor returns massively under perform investment returns because they trade around constantly and at the worst possible moments. So start. Ideally 125 years ago. Or 25 years ago. Or today.
Conclusion
If you’re money’s not put to work doing something else, it should sit in a direct S&P 500 index. If you own it in a direct index then the money you save on fees and taxes will compound; decade over decade the compounded savings could be worth many millions of dollars.
TL; DR
I have owned the S&P 500 all of the second US century and intend to for as much of its remainder as I live through. You might want to own it too. The best way to do so is here.
