Are the Markets Actually Broken?
We have all heard it—or maybe are guilty of saying it ourselves...
Seeing large caps move ±10% daily on no news (or at best questionable third-order effects), time horizons becoming shorter and shorter, quality or value investing "legends" like Fundsmith seemingly throwing in the towel and giving in to the momo gods...
Are these signs of structural shifts in public market dynamics that will have a massive impact on the way we invest?
Or is this simply a temporary regime change caused by bubble dynamics, where value or quality (whatever factor you choose) eventually comes out on top over the long term?
If that's the case, should LOs continue to underperform in the hope that sticking to their guns works out LT (as we've been told countless times throughout our careers)?
How do you balance NT underperformance and sticking to your guns with the lack of fundraising that comes with underperforming, and the fact that it's detrimental to LT business survival in the long-only, fee-only world where it's all about scaling?
I ask as a relatively junior investor (5 years' experience) who grew up reading the compounder bros and Buffett-type stuff: "We must hold quality businesses through any drawdowns because that shows conviction in our process/philosophy, and in theory it'll work out LT"... blah blah blah.
Just wondering if you think this style will work again LT, or if things have truly changed and if you arent running some factor neutral strategy making sure you dont get burned over the NT your death is now accelerated further?
Based on the most helpful WSO content, your concerns touch on some of the most debated topics in investing today. Here's a breakdown of the key points and insights:
1. Are Markets Broken or Experiencing a Temporary Regime Change?
2. Challenges for Long-Only (LO) Managers:
3. Balancing Short-Term (NT) Underperformance with Long-Term (LT) Conviction:
4. Will Traditional Value/Quality Investing Work Again?
5. Practical Advice for Junior Investors:
In summary, while markets may feel "broken" in the short term, history suggests that disciplined, long-term investing strategies can still succeed. However, adapting to the current environment and balancing NT pressures with LT goals is crucial for survival and success in today’s market.
Sources: Long term, concentrated, deep fundamental investing, https://www.wallstreetoasis.com/forums/the-only-post-about-active-investing-you-will-ever-need-to-read?customgpt=1, What is the secret sauce? Feel like I don't know anything, How does LT investing work?
bump
The market cycles have gotten wonkier and wonkier over the last few decades - we've made it a policy choice, in my view, to 'smooth' out markets as much as possible with incredibly accommodative policies both fiscally and monetarily. There's no doubt that it's harder than ever to be a large cap value investor (whatever the hell that actually means - don't get me started on the whole value vs growth when half the companies are in both buckets in some of the indices that track them). That reached it's peak, for now, during COVID - and we are still feeling the impact of that today.
When you add that to the structural changes - rise of passive funds, consolidation of public equities, corresponding rise of private markets, high frequency trading, 24/7 markets, leveraged products, and the national fascination with the stock market being the end all be all - it's a lot. I’m sure in any given decade, or multiple decades, you can find the same set of ‘things’ impacting the market – and I’m barely scratching the surface of all of the dynamics. Remember when everyone thought SPAC’s were the ‘new’ way to bring companies to market? Me neither.
My point being that the whole ‘markets are broken’ spiel is a bit tired to me – what’s the point? You invest in the market you have in front of you, and the cycle you are currently in. We are in the ‘risk, what’s that?’ – where made up things like a crypto treasury company outperforms, and someone who thinks about FCF gets roasted over the last 5 years by picking the wrong stocks. Terry smith seems like a very bright guy, who didn’t adapt quickly enough, and runs an open-ended retail-oriented fund – not much else for him to do than try and stop the exits with a ‘pivot’ that basically turns his fund into a concentrated, absolute return large cap equity fund given he claims no actual benchmark. Buffet, which you mentioned, has none of that – he built a business that has embedded capital through a combination of insurance float and retained earnings from all his investments, the ability to re-invest that cash into high quality investments, and the patience to build tons of cash to get incredible deals when markets go red. He’s a wolf in sheep’s clothing, in a good way I think.
Don’t let anyone fool you, this business is hard – asset owners are large enough now to command lower fees, higher returns, and have their pick of firms who will bend over backward for them. LO AM’s are increasingly becoming large, service driven organizations – investing more in technology, marketing, distribution, client experience, risk, administrative - than they are in the actual ‘management’ of assets. They want to win stickier mandates like E&F, pension funds, etc. which also have the benefit of caring about things beyond just ‘returns’. Which is what is incumbent upon any manager to set up front with their investors – what do you need from me, what am I doing for you, and how do we align on the results. The outset is where you can manage bouts of underperformance – and even then, eventually, luck runs out if you can’t figure it out. We have a hard enough time guiding clients who need 7% returns to fund their pensions away from benchmarking purely to S&P 500 headline return numbers – I can’t fathom how challenging retail money is.
I’m on a plane, and now rambling, so I’ll wrap this up. What I’ve seen work over time is patience, discipline, and the ability to resist overshooting in any direction. High quality, cash generating companies will be back en vogue again sooner than later – and if you buy them when the markets are getting crushed, chances are you’ll do quite well.
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