Economist Writing Every Day

I thought this was going to be another election post, but it didn’t turn out that way.

My plan was to do another annual portfolio review, with a focus on changes I’ll make to my portfolio as a result of how the election impacts various market themes, and how my take on the election differs from the market’s take. But as I looked at my portfolio, what struck me wasn’t how the election changes things, but instead how severely my stock picks underperformed the incredible 26% return the S&P has posted so far this year.

My first couple years of stock picking tended to match the S&P, roughly what you’d expect if markets are efficient and I’m just throwing darts. But more recently so much of the overall return of the market has been driven by just 7 mega-cap stocks, the “Magnificent 7”, that if you don’t own them you are probably underperforming big time.

Of course buying a broad index, especially a market-cap-weighted one like the S&P, is a way to ensure you own at least a piece of the big winners, which is one reason economists usually recommend buying the broad index. And I did this with 80% of my portfolio, to match my 80% belief in the efficient markets hypothesis. But I’m now back up to 90% belief in efficient markets, at least for stocks.

This efficiency seems to change a lot over time. Probably fewer than 10% of US stocks have obvious mis-pricings right now; really none stand out as super mispriced to a casual observer like me. Instead, it seems like every 10 years or so a broad swathe of the market is driven crazy by a bubble or a crash, and you get lots of mispricing- like tech in 2000, forced/panic selling at the bottom in 2009, or meme stocks in 2021. The rest of the time, the stock market is quite efficient. So, in typical times, just be boring and buy and hold a broad index fund.

Of course, you might think that AI is a bubble now. I certainly don’t love the 68 P/E on NVIDIA, but this doesn’t strike me as a true bubble driven by irrational hope- peoples’ hopes have proven well justified so far, with AI performing miracles and the Mag 7 delivering huge profits. So like Scott, I’m finally giving up on being overweight value stocks. Perhaps our capitulation is the sign that growth’s decade-plus run is finally about to reverse; but if so, I’ll try not to regret it. After all, the S&P has plenty of value stocks too.

So here’s what I’m doing:

I’m going through my portfolio and asking, not the wrong questions like “is there anything good about this stock”, or “do I think this will beat cash”, but instead “do I really think this is likely to beat a broad index like SPY or VT”?

Sell INTC: Finally getting rid of this company that managed to post big loses in the middle of the AI boom while the Feds shoveled money at them.

Sell TAN: Solar also managed to have a terrible 3 years in the market even as the government sent them lots of subsidies; now the subsidies are falling, and the P/E is over 100 even though the index is down by two thirds. At least they installed lots of capacity along the way; I still believe in solar the technology, and I’m glad I have panels, but I’m not optimistic about these stocks over the next few years.

Sell NVAX: Like solar, they made a great technology but don’t know how to execute it profitably, and I’m tired of waiting for management to get their act together. Best case is that a company that knows what they are doing acquires them. Easier antitrust from the new administration could facilitate this, but anti-vaxers getting appointments in HHS could hurt them.

Sell EOG, MGY, LNG: I bought a bunch of gas stocks back in 2022 because they were stupidly cheap, with P/Es of 5-6, but they have now appreciated to reasonable P/Es of 10-13.

Sell OEC, OBE, CHRD, MBGYY, DKL: Turns out they were cheap for a reason.

Sell all TUR, some EPOL: I liked these at P/E 5 but they are starting to seem risky at P/E 8, especially Turkey.

Sell GMOM: How has a momentum-based ETF been flat during two years when markets were way up? Isn’t this exactly the sort of thing that should have been allocating heavily to continuous winners like the Mag 7?

Sell GAA: The 0.37 expense ratio doesn’t look terrible, but then it allocates to a bunch of other ETFs that charge their own fees. I can get global stocks with much lower fees through VT, and buying global bonds and real estate at my age is just silly.

Sell GVAL: Giving up on being overweight value, and if I just want global stocks there are much lower-fee options like VT.

Sell SMIN, FLIN: I like India’s real-world prospects but think this is probably priced in at this point; their stocks are the most expensive in the world. Think I’ll get enough India through the lower-fee global index.

Sell GS, TORM: Here’s one election related choice: these are still cheap at P/E 3 but I don’t love shipping when we’re about to kick off a trade war.

Sell GD, BAESY, RNMBY: Usually people think Republicans will be good for defense stocks, but I’m not convinced that will be true this time around. The plan at least looks to be to end wars and cut spending, especially on the traditional primes. Perhaps Europeans will spend more to make up for it, but I don’t want to bet on that.

Buy SPY and VT: Putting most of the money from these sales into the S&P; keeping the rest in cash safely earning 4% or in prediction markets where, unlike stocks, I actually seem to have some alpha. Not owning lots of individual stocks also simplifies taxes. Maybe all those economists were on to something!