The Tortoise, the Hare, and the Unicorn

Category: Blog

One of the many financial mysteries of this intensely mysterious year has been the almost incredible upward trajectory of the very largest growth stocks. This trend asserted itself even throughout the darkest days of February and March, when the rest of the equity market was getting massacred.

Indeed, there were fairly long stretches during the year, even as the market recovered, where these great growth companies’ stocks weren’t just going up more than anything else: they were going up more than nearly everything else.

Moreover, as the year wore on, a significant number of newer companies went public at somewhat mind-boggling valuations relative to their negligible (if any) earnings—and went up spectacularly on their first day of trading.

Thus, at some point this year, you might not have been human if you hadn’t thought—if only just for a moment—“Why do I own anything but those five big, time-tested tech stocks?” Or even “Why am I buying anything but these red hot IPOs?”

Permit me to suggest an answer. First, though, let me confess my bias, because you must take it into account. To wit: I am the tortoise. (There, I’ve said it. I feel so much better now.) That is to say: in the Aesop’s fable of the tortoise and the hare—a race between a creature marvelously fleet of foot in short bursts and one who simply but relentlessly plods—I’m the plodder.

In my defense, I note that Aesop was telling this highly instructive tale around the year 500 BC. And that people have been retelling it ever since, which makes this a story that’s been worth paying attention to for two and a half millennia, and counting. And in every telling, guess who always wins?

Further to my bias: I’m a very broadly diversified investor in mainstream equities—large, seasoned, well-financed and innovative companies with relatively long, credible records over major economic/market cycles. Just to give you a sense of the quality I’m talking about, you can have a look at the companies in the Standard & Poor’s 500-Stock Index. Said Index has, I remind you, been compounding (with reinvested dividends) at around 10% per year for about the last century.

(“Wait,” you may cry. “Compounding at 10% per year? That’s hardly plodding, old boy.” To which I would reply, “Bingo.” But we would be getting ahead of ourselves.)

To us tortoises, the wonderful thing about very broad equity diversification is that, though we will never own enough of any one company/industry/idea to “make a killing” in it, we will most probably never own enough to get killed by it. (Think: the internet in 1999.) I know that’s not a very scientific definition of diversification, but—on behalf of tortoises everywhere—permit me to say that in this instance the vernacular works just fine for us. But suppose we were now to chuck our diversified portfolios and place the proceeds in the five (or six, or nine) largest, best-performing stocks of 2020. (“Best-performing” would, of course, imply “the five or six or nine stocks that went up the most before we bought them.” Framing the issue in just that way might give one pause, might it not?)

The more narrowly one constructs a portfolio, the greater one’s opportunity to outperform an index. Or to underperform it. This is especially true if one is narrowing down the portfolio to just those stocks that have lately been the hottest. But of course, that’s not investing anymore. It’s speculating on the continuation of hotness. Hares, in this analogy, speculate. Tortoises invest. The difference is not at all semantic.

Nor, at the risk of hopelessly mixing metaphors, do we tortoises go on unicorn hunts. Other than with a small amount of play money drawn from a much larger pool of capital, a tortoise would not (for example) buy the shares of a company that had negligible to nonexistent earnings, but that was going public at a $50 billion valuation. Still less would he buy it in the aftermarket after it had doubled on its first day of trading, i.e. when it now had a $100 billion valuation…and no real earnings. We would leave such a strategy to the speculators.

Like the tortoise who’s been beating the hare for 2,500 years or so, we broadly diversified, mainstream equity investors are more than happy with the opportunity—not the certainty, mind you, just: the opportunity—to perhaps accumulate wealth very slowly.

My guess is that, on balance, your financial advisor will probably agree with Aesop—and with me, for that matter: slow and steady wins the race.

© January 2021 Nick Murray. All rights reserved. Used by per- mission.

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