A Year Like No Other
The New York Times has named 2020: “The year like no other.” When our grandchildren were born, I started a time capsule for each of them and will contribute to it each year until their respective 21st birthdays. Certain years are so eventful that they are regarded as pivotal in history, while others require a scramble to identify something about them as unique. History considers 1865 as pivotal for the end of slavery; 1945 as the end of World War II which saw 291,557 American battle deaths; and 1968 as a time when deep generational fissures burst into the open. Certainly, 2020 will join the memorable list. Even now it is hard to remember how many 30-font headlines we have seen this year: the announcement of a mysterious respiratory ailment from China, a Presidential impeachment trial, the death of George Floyd and many others, Black Lives Matter protests, massive wildfires, an energetic hurricane season, the death toll of the novel coronavirus almost surpassing 2 million worldwide, the breakdown of global supply chains, the silent streets of megacities, and the list goes on and on.
Since March, a lot of us have been confined under various forms of house arrest, watching talking heads on TV, who were also in their homes. As the global pandemic strained the boundaries of our houses, monitors and TV screens seemed to be the conduits to let the outside in. We watched TV series that required too much time previously, we attended virtual conferences, we talked to our families and to our co-workers remotely. We were tethered to the larger world by the blue light of our screens. We had to shake ourselves at times to be cognizant and remember that the entire world was in some form of lockdown.
It makes perfect sense that given this scenario, the onset of COVID-19 sent the 2020 fundamentals for the economy and most companies down. Yet, in 2020, the market endured just a very short 23 trading days of trouble before resurging to an all-time high. Growth stocks, including most highly speculative ventures, have continued to dominate the landscape, creating the widest performance spread to value stocks in history.
As shared by FMI Funds and others, on the following page, are some recent observations:
• The total market value of the NASDAQ Composite stocks recently became larger than the combined value of the developed world stock markets, ex-U.S. (MSCI World Ex USA).
• Four tech names: Apple, Amazon, Microsoft, and Alphabet, became bigger than the entire Japanese market, as well as the combined China/Hong Kong stock market.
• Tesla Inc., barely profitable after 17 years and competing in a highly competitive industry, saw its market cap go up over tenfold (from $38 billion to $400 billion) in the 12 months ended 8/26/20, including a 75% gain in the three weeks following the 8/10/20 stock split announcement.
• Apple, whose operating earnings peaked five years ago at $71.2 billion, saw its market capitalization go from about $600 billion five years ago to over $2 trillion recently, including a 40% gain in a little over a month after their stock split was announced on 7/30/20.
• In Q3, Apple’s market cap became larger than the entire Russell 2000 Index, and also overtook the FTSE Index for the first time.
• Special Purpose Acquisition Companies (SPAC), empty shell corporations set up to buy companies, have received over $50 billion so far this year.
• The High-Tech Strategist reported in September that the top five holdings of Vanguard’s Total Stock Market ETF and the SPDR S&P 500 ETF were Apple, Microsoft, Amazon, Alphabet, and Facebook. These five holdings were also the largest in iShares Russell 1000 ETF, iShares Russell 3000 ETF, Vanguard Growth ETF, Vanguard Total World Stock Market ETF, Fidelity Magellan Fund, Fidelity Independence Equity Fund, Fidelity Trend Fund, and Fidelity Disciplined Equity. We surmise that they were the top five holdings for many funds as well.
• Indeed, the S&P 500 is more concentrated in the top names than at the peak of the 2000 market.
• Since 1947, the median number of US worker hours required to purchase one unit of the S&P 500 was 30. As of early July, it is over 140 hours.
• Robinhood Financial LLC has added over 3 million customers since the beginning of the year. Measures of retail investor speculation are near their highest ever, including small-sized option trading that now exceeds the trading volume of individual stocks.
• In the 22 trading days following the 11/03/20 election through Friday, 12/4/20, the S&P has gained +10% and set 7 all-time record closings.
• Two of the three best months for the S&P 500 over the last 30 years, occurred during the pandemic with April 2020 ranking #1 and November 2020 ranking #3.
By any measure these are stupendous statistics, but occurring within the context of a global pandemic that has already killed 2 million people, the juxtaposition becomes almost surreal.
Oh, and did we mention that two major tax laws, which affect all clients, were enacted during the last 12 months: The SECURE Act of 2019 became law last December and the CARES Act became law in March 2020. This says nothing about the 2020 Presidential Election, which promises significant tax increases that affect clients unevenly.
All of this news has certainly made our jobs tougher.
So how are we handling this mass (mess) of uncertainty? We are proceeding with equanimity and fortitude. Here are our broad client accomplishments in 2020:
• We replaced all of our portfolio management systems with cloud-based systems with an effective date of 12/31/19.
• We were completely virtual and able to work remotely effective at the beginning of the Pandemic.
• We replaced computer monitors and laptops so that we have the latest technology for ZOOM conferences.
• We had spent most of 2018 and 2019 researching active ETF’s and other quantitative methods. In the fourth quarter of 2019, we were able to check our hypothesis that introducing ETF’s helps lower costs and reduce tax friction. During the five-day market meltdown in March, 2020, we had all the information we needed to make massive rebalancing changes to the client portfolios for maximum tax efficiency. As many of you noted in recent portfolio reviews, 2020 capital gains distributions have been reduced as a result of these trades.
• We validated cash positions in all portfolios to maintain a three-year working capital requirement.
• For those that had excess cash, we were able to take advantage of the market sell-off to make some advantageous purchases.
• We also rebalanced portfolios to be strategically weighted to both growth and value stocks and domestic and international stocks. We actively and objectively followed quantitative models to achieve these goals. Minus a handful of highly idiosyncratic portfolios, having more growth positions in the portfolio has significantly helped performance and the strong rebound from the March lows.
• While most portfolios are still not beating the S&P 500, truly, we have developed the portfolios to take advantage of all markets, not just 5 stocks, to lessen volatility.
• We have spent over 250 man-hours validating our portfolio positions, looking for durable, adaptable, and resilient businesses that can be held for the long-term, over many different market cycles.
• We have redesigned our client presentations and many clients have appreciated the new format. All clients will have received the new presentation by mid-January 2021.
• Adam read 47 books through 10/31/20, over a book a week. In the first days of the pandemic, I was too stunned to read at all. The habit has returned, but slowly and gingerly, and I too am finally back to my one book per week average.
• Adam is the prime writer of the blog and looks to his kids for inspiration and analogies. We are now able to track reader involvement and based on outside research readership we are getting increased participation.
• Virtual conferences are exploding and Adam and I are in agreement that they are an enriching enhancement to our lives. In addition to TED talks, we listen quite frequently to SALT talks, portfolio management conferences, CFA conferences, economic conferences, CFP conferences, travel conferences, writer conferences, and the list goes on. Adam has recorded his participation with 27.25 CFA continuing education credits, and 55 CFP continuing education credits. I haven’t maintained a log but my participation has also been quite extensive. These virtual meetings are direct, condensed and enlightening, although sometimes we feel like voyeurs trying to read all the books on the speaker’s backdrop.
• We are literally drowning in emails. In a little twist, we now get emails from individuals at companies, rather than companies directly. Individual branding has taken off. This makes it extremely difficult to delete or block mail. Recently, Fabio is my nearest and dearest friend. It is annoying, non-productive and time-consuming.
• We have talked to all clients as to the applicability of the new laws and tax proposals, especially those that must be completed by year-end.
• It has been a busy, anxiety-ridden, provocative year; everyone seems to be in concurrence with this!
Our Plans for 2021!
One of life’s remarkable and truly unexpected pleasures is being able to work with your adult son in a professional capacity. Adam has been working for Wright Associates for over eight years now. What started as a brief, temporary stint to provide IT and data collection and to obtain his MBA has now morphed into a true partnership. He received his MBA with highest distinction and was accepted into The Delta Gamma Sigma International Honor Society for collegiate schools of business; after another arduous three-year journey with a minimum 300 hours per year of study, in August of 2016, he obtained his CFA, the gold standard of the investment industry; then in April of 2019, following further work and study, he obtained his CFP that broadened his capabilities to provide integrated financial planning services. He regularly corresponds with investors worldwide to understand the global marketplace from many perspectives; his trip to China with a geographically diverse group of investment professionals has proved to be invaluable. His analytical mind, dedication to the fiduciary standard, ability to embrace new technology has led to distinct, clear and insightful client reports which are a credit to our profession. In recognition of his dedication and pursuit of excellence, he is becoming a 30% owner of Wright Associates effective 12/31/2020.
I am both a very proud mother and an ecstatic President of our registered investment advisory firm, to have found such a worthy successor to the business that we have developed over the last 20 years. Adam is excited about continuing our fiduciary tradition and embracing the generational changes in the marketplace that occur with every business. Although the planning has been in the works for a long time, COVID was the catalyst for a new beginning for the business.
During various client meetings, the topic of generational wealth transfer has come up. Greg Lintner and I are not immune to the problem. As with any investment professional, if you are not managing your own investments, who is worthy of this responsibility? We have pondered this question for a quite a while internally. Both Greg and I believe strongly that professionals mentored by experts who embrace fiduciary standards, educational accomplishments, and passion was our best solution. The best of us has been taught, by us, to Adam, who has caught the ball and ran with it. Please join us in congratulating Adam on his success.
Important Disclosure Information: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Wright Associates (“Wright”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Wright. Please remember to contact Wright, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Wright is neither a law Firm, nor a certified public accounting Firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Wright’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at kswrightassociates.com.