Controlling Risk
“Risk is about dealing with problems to which there is no certain solution.” —Peter Bernstein
While escalation in the Middle East and higher oil prices seemed to cause markets to decline early in the week, an end to the port strike and a strong September payroll report led to a rally on Friday. For the week, the S&P 500 was up 0.22%, the Nasdaq rose 0.1%, and the Dow was up 0.09%.
Stock markets have had a good year. The S&P 500, for example, was up about 21% through the first three quarters of the year, which ended early last week.
As we’ve seen several times in the last several years, the “Magnificent 7” once again led the way. As a group, they are up about 35% this year and account for 45% of the S&P 500’s return. This follows a return of 76% in 2023, as those seven stocks contributed 63% of the S&P 500’s 24% return last year. Once again, large-cap growth stocks have continued to trounce small-cap value stocks.
How long can this run of strong market returns continue? And what might cause it to end?
It’s hard to say. Turning points are hard to call. In 2022, higher inflation and rising interest rates seemed to be the catalyst. But in other times, like the year 2000, there is far less of a definitive catalyst. Sometimes, the world just realizes that trees can’t grow to the sky.
As an investor, earning good returns while controlling risk so that you’re ready for the eventual turn is a mark of skill. As Howard Marks has written:
Controlling risk is the mark of a professional. Anybody can make money when the market goes up. And most of the time the market goes up. And anybody who takes above-average risk can do above average when the market rises. So achieving returns is not a point of distinction in good times. In my opinion, the distinction of a superior investor is achieving returns in good times with the risk under control, because you never know when the environment is going to shift from favorable to unfavorable. And the question is: are you prepared?
Maybe the current set of risks making headlines will cause that shift. Or maybe it’ll be some other set of risks. But whichever ends up being the case, the things you do today will have you either prepared or unprepared for the eventual turn to less favorable times.
“Risk in our world is nothing more than uncertainty about the decisions that other human beings are going to make and how we can best respond to those decisions.” —Peter Bernstein
Tweets of the Week
In Case You Missed it…
J.P. Morgan Asset Management’s 4Q Guide to the Markets
Bill Ackman’s slides from a talk he gave about Harvard
Avoiding the ‘Uh-Oh’ Moments - by Adam Wilk
The Intentional Investor Show: Drew Dickson (video)
Why This Investor Doesn’t Just Dabble In the Market: Brad Gerstner Reveals His Strategies (video)
3 Things (with Ric Elias) Podcast: Technology vs Presence (Patrick O'Shaughnessy)
The Knowledge Project Podcast: The Blueberry Billionaire | John Bragg
Dwarkesh Podcast: Daniel Yergin – Oil Explains the Entire 20th Century
All In Podcast: John Mearsheimer and Jeffrey Sachs | All In Summit
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