Despite good earnings fundamentals, the S&P500 is up only 2.6% through the end of the 1st half, probably due to fears of rising rates and possible trade wars. As in prior years, most of the gains have come from the FAMAA (Facebook, Amazon, Microsoft, Apple and Alphabet) stocks. Without these Fab5 the S&P500 would be barely up for the year. Despite never investing in FAMAA stocks our investments have performed well. In fact 16 of the 42 stocks we own, roughly 40% of the portfolio, have more than doubled since we first purchased them. Some of these have tripled or quadrupled and the best performer is now a 16-bagger. None of these investments experienced a smooth ride after we invested in them. Over the years there were numerous large share price declines due to earnings misses and lowered growth expectations. These stocks are not isolated to a particular sector but spread across the consumer, financial, healthcare, energy and technology sectors. We hope the remaining 26 stocks catch up with their brethren over time.
In our past writings have we discussed the critical benefit of a long-term investment time horizon for investors. We pointed out that though stock market volatility can be considerable in any given year, it is smoothed out with the passage of time. As a result, investors with long term time horizons and/or higher risk tolerance levels maintain a significant competitive advantage when it comes to investing. However, of course, many investors struggle with short term volatility. Because of this, we thought we would touch on another tool that can be helpful to investors this quarter – Diversification. Additionally, because diversification plays a critical role in determining whether we as investors ultimately achieve our goals, we will share a useful tool known as a benchmark which can be used to help monitor its relative effectiveness.
The rally since the November 2016 elections has continued more or less unabated, until recently. The passage of tax reform has added more fuel to the stock market fire. The S&P500 was up 21.8% in 2017 while Alamar Equity gained 21.4%. Since inception in 2010, the S&P500 is up 13.9% annualized and Alamar is up 14.1%. In hindsight, our timing was fortuitous; however, we did not expect such rapid gains so quickly out of the chutes.
The S&P 500 was up 4.5% in the 3rd quarter, its 8th quarter in a row of gains. The index was up 14% through the third quarter, and has not posted a negative annual return since 2008. In that time, it has now provided a cumulative return including dividends of almost 200%! This move has equity investors feeling complacent, while others more conservatively positioned are growing anxious about how to best position themselves moving forward.
The first six months of this year have led to repeated new highs for the US stock market and in many other parts of the world. The S&P500 is up roughly 9.3% through the end of June, primarily led by a few well-known names with large weightings in the index.
The election of Donald Trump as the next US President led to a furious market rally in the 4th quarter. The S&P500 was up almost 6% in the last 2 months of the year, roughly half of the full year’s gain of 12%.