The Stock Fixation

Originally published in the Brandywine Asset Management Monthly Report.

Last month, Mike Dever published an article titled “The Future Returns from Stocks and Bonds” that used simple math to establish a price level (and total return) for stocks and bonds at the end of this decade. It wasn’t the result of his research that we found the most interesting (but if you want to see why the S&P 500 is projected to be lower at the end of the decade than it was at year-end 2013, you can read the article here), it was the comments we received from readers of the article. There was one comment that epitomized the gambling mentality of the average “investor.” In referring to those pundits who have been incorrectly predicting a decline in stock prices ever since the financial crisis, he wrote: “Anybody that listened to them for the past five years is in a world of hurt.”

We’re not arguing those pundits weren’t wrong. Clearly, stocks rallied sharply throughout that period. But it shouldn’t have mattered significantly. Here’s how Mr. Dever’s response summed up the core investment philosophy underlying Brandywine’s trading:

“If a 12-year (as of five years ago) projection of what returns would be earned by passively putting money into the S&P 500 has a significant impact on the performance of a person’s portfolio – if it resulted in them being in a “world of hurt” if they were wrong – then they’re not an investor. They’re a gambler. They have far too much riding on one single decision.

The performance of the S&P 500 should have no greater impact on the performance of a person’s portfolio than that of the sugar market, or dollar, or Korean stocks or any number of the hundred plus other active global financial and commodity markets. There are legitimate Return Drivers that can be exploited to profit from trading in those markets as certainly as there are Return Drivers to be exploited to profit from trading in the S&P 500.”

The “world of hurt” comment points out the fixation people have on owning stocks as a major portion of their investment portfolio and it continues to amaze us as to how many people continue to bet their savings on a single Return Driver. As Mike Dever shows in the opening chapter of Exploiting the Myths (also released under the best-selling title Jackass Investing), in periods of less than 20 years, stock market prices are dominated by investor sentiment. It is gambling to bet a substantial portion of a portfolio on that single Return Driver.

From the standpoint of seeking the greatest returns while being exposed to the lowest risk of achieving those returns, any of the 100+ actively traded global financial and commodity markets should be just as important to investors as the U.S. stock market. Yet there is virtually no discussion among investors about Australian bonds, coffee prices, or sugar – while the stock market dominates the news. Why isn’t there a C(offee)NBC discussing freeze potential, new export markets, diseases affecting the coffee crop, etc.? For the reason that not enough people care. Because stocks dominate the financial news, people buy stocks. Because people buy stocks, the financial media panders to that exposure.

The result is a gambling mentality – where the price activity of a single market dominates a person’s wealth. The financial media and professionals promise safety and diversification, but deliver roulette. You are not constrained by this mentality. You don’t need to gamble on stock market event risk to earn stock market returns. In fact, by diversifying across Return Drivers you can target even higher returns while also reducing risk. This is the basis of true portfolio diversification. Its effectiveness is evidenced by the performance of Brandywine’s Symphony Preferred, which has not only outperformed stocks over the strong bull market of the past few years, but also gained in January when stocks fell globally.

Please feel free to contact Rob Proctor at if you would like to learn more about Brandywine’s Return Driver based investment philosophy and our approach to true portfolio diversification.

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