Holding Two Opposing Truths

Holding Two Opposing Truths

August 24, 2023

F. Scott Fitzgeral famously wrote: "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

This quote's application to the current state of the capital markets could not be more relevant.  Why?

First, let's recognize that the market is kind of like life - wonderful and dangerous. The world is wonderful place full of incredible things, people, and places. Life can be joyous and exhilarating but at the same time filled with dangers and potential tragedy.  Still, we move forward. The markets are no different.  Long term, life will go on and things will improve.  Human enterprise, ingenuity, and curiosity move us "hopefully" toward progress.  Although we can all put on our "Debbie Downer" glasses at times, I think the fact is that life has gotten better for us humans over time.  I think the same can be said for the stock market.  Over time, stocks have risen and corporate profits have increased.  However, there are still significant risks to the stock market.  Bear markets will undoubtedly appear. We will have crashes. Fortunes will be lost due to bad decisions, bad timing, and bad luck.  At the same time, as we wait for the next bear market, crash, or financial crisis, fortunes will be made, profits taken, portfolios swollen.

As of this writing in late August of 2023, the NASDAQ is up over 31% year-to-date*.  That's impressive, never mind the fact that it is still trading below its 2021 peak.   It, along with the stocks powering its performance this year, are what I like to call "shiny objects".  And, by the way, if you're expecting me to write the epitaph of this index on this blog, you will be disappointed.  No, I think the NASDAQ goes much higher... at some point.  The NASDAQ contains some of the most amazing companies on planet earth with technology that will lead us into domains of human existence that we can't possibly comprehend.

At the same time, it can be dangerous.  Let’s not forget that the NASDAQ peaked in March of 2000 at 5132.  It bottomed in March of 2009, -75% lower.  It did not break even until the summer of 2015, over a decade and a half later.  Recently, we saw the NASDAQ peak at 16,212 in November of 2021. At this writing, we are still (even with a 31% run ytd) over -15% below that peak.  Could that NASDAQ soar well above its 21' peak and keep racing higher?  Yes.  Could it also break much lower? Of course!

So, holding these two opposing ideas in our heads, we must understand that some shiny objects are swords - a sword you may live and die by, let alone fall on.  The most important thing to focus on is one's time frame, stage of life, and risk tolerance.  If you're in the accumulation phase of your life, decades from retirement and a net saver, it likely won't matter if the stock market goes into a protracted bear market. You should be fine.  However, if you're approaching or are in the distribution phase of your investment life, a protracted bear market could be devastating. And, since we don't know when the next bear market will come, we manage this risk in the most methodical ways we can - diversification, asset allocation, an understanding or the credit and market cycle, and risk management customized to the individual.

I will close with this.  A pilot friend shared a saying that I think applies to portfolio management; "There are old pilots and there are bold pilots but THERE ARE NO OLD, BOLD pilots."  The same can be said about one’s portfolio and financial plan.

*Past performance is no gurantee of future returns. Source: Thomson One