Traffic and the Stock Market

Last week I was working late into the evening finishing up some client meetings when I received a superbly-timed text message that lifted my spirits after a long day of work.

“I know it’s late notice, but I have an extra ticket to the Jazz game tonight if you can make it.”

Being a pretty big Utah Jazz fan, offers like this are hard to pass up. Free tickets? You don’t have to ask me twice.

I looked at the time and figured if I left the office right at that moment I should be able to make it to the arena just as the game was set to start.

I hopped in my car and began to make my way to the arena only to realize rush-hour traffic hadn’t yet dissipated. I hadn’t factored traffic into my calculations and before I knew it I was at a complete standstill on the freeway.

Suddenly worried that I wouldn’t make it to the game in time, I did what any rational person would do in that situation and decided to maneuver my way through the different lanes to beat the traffic.

Feeling confident in my abilities, I noticed the lane directly to my right was moving at a fairly good pace compared to my current lane which wasn’t moving at all. So I turned on my blinker and whipped my car over to that lane.

I maybe moved a car or two forward when all of a sudden that lane’s traffic came to a halt too. So I looked around again and found the rightmost lane was moving at a good clip. I turned on my blinker, navigated to the new lane, and progressed a couple paces forward only for the traffic to stop once again.

Feeling frustrated at this point, I glanced over and saw that the original lane I started from was moving faster than all of the others now. Like really fast. I couldn’t believe it. I tried my best to make my way back to that lane but by the time I got there, the cars had come to a full stop.

You can see where this is going.

I did this same routine a few more times with equally unsuccessful results. After a while, it dawned on me that I would have been a lot further up the road had I just stayed in my original lane.

Coincidentally, in one of my meetings earlier on that very same day, I spoke with someone who was feeling disappointed in their investment performance over the past couple of years. They were looking at certain segments of the market that seemed to be moving faster this past year than their investments and felt like they were being left behind.

In a nutshell, their question was can we find what has been the fastest-moving lane and avoid the traffic?
Well, you can certainly try to pick what will be the best-performing stock in a given year or what segment of the market will outperform, but history tells us investors have a bad track record when it comes to chasing the hottest funds of the moment.

Ken Heebner’s CGM Focus Fund was the best-performing U.S. stock mutual fund from 2000 to 2009. His fund was up more than 18% annually during a decade where the S&P 500 lost close to 1% per year. Because of his success, he was named Morningstar’s fund manager of the decade.

However, the problem was investors would add money to the fund after a huge year like in 2007 when the fund was up 80%. Then they would take their money out after it started to fall like in 2008 when it was down at 48%.

This selling low and buying high led to an average investor return of a loss of 11% annually. The best-performing fund of the decade saw its own investors underperform the fund itself by almost 30% per year.

When asked about what went wrong Hebner said:

“A huge amount of money came in right when the performance of the fund was at a peak. I don’t know what to say about that. We don’t have any control over what investors do.”

Standard & Poors has a study that looks at the consistency of the top-performing mutual funds. The study found that for all U.S. equity funds that were in the top 25% of performance in 2019, only 4.8% of those funds remained in the top quartile after two years. They do this study each year and the pattern repeats itself year in and year out.

A saying I’ve heard is, “Nothing fails quite like success in the stock market.”

One of the few dependable features of investing in the stock market is that it’s cyclical. Nothing lasts forever. There is no strategy that always works all of the time. And yes, that even includes big tech stocks.

For those who may be unfamiliar, the U.S. stock market has essentially remained flat since the middle of 2021. The last all-time high was at the end of 2021. And there are hordes of people eager to give you different reasons about why that has been the case—from interest rates, to inflation, to the Federal Reserve, to the labor market, and on and on.

But if I may, I’d like to offer up a simpler answer. The last decade was a great run for the stock market and mean reversion was bound to make an appearance at some point.

There will always be certain investments or strategies that do better than others at any given time. Unfortunately, many investors will pile into these investments only after they’ve already experienced strong outperformance—which is a sure way to underperform.

The best long-term investment strategies will never be the best performers in any given year. They only show their true colors over long periods of time.

That’s the ironic thing about navigating the stock market and traffic—by trying to get to your destination faster, you’ll cause yourself to be late.

Thanks for reading!