The Legacy Perspective - November 2021

by Steve Wachs, CFP®

My wife and I have property in Northwest Arkansas which is beautiful this time of year. On one of the trails illuminated by the fall tree colors, we came across a sign highlighting Ozark folklore.

Guided By Superstition - “Ozark Magic and Folklore” by Vance Randolph

Ozarkers had a complex system of folk tales and superstitions that guided their day-to-day lives.• If two friends are walking side-by-side and allow a tree to come between them, a serious quarrel will soon follow. To avoid this, the pair must instantly, and in concert, say “Bread and Butter.”• When groups of unmarried young women gathered at quilting bees, they shook up a cat in the new completed quilt. Whomever the cat jumped toward would be the first of the bunch to get a husband.• If a bachelor sits between a husband and wife at the dinner table, he will be married before the year is out.This made me consider the financial and investment folklore that many of us have heard and may believe.

Rate of Return is the most important component of wealth creation.

It is easy to get focused on the outstanding returns of different investments and become obsessed on trying to find the next “home run.” The most important element of wealth creation is time. Look at the following hypothetical example:1. $50,000 invested for 35 years and earned a 10% rate of return - $1,405,0002. $50,000 invested for 15 years and earned a 20% rate of return - $770,300An investment that generates a 20% annualized return (which is hard to find) does not make up for the power of compounding over a longer time frame. That is why Albert Einstein termed compounding the “8th wonder of the world.”

Sell in May and go away.

The idea behind this maxim is that since the stock market, on average, tends to underperform in the six-month period between May and October, investors should sell their stock holdings in May and buy back in November. I always wanted to believe this theory as it would be a great reason to get out of Dallas as the summer approaches, go work on my golf game in Colorado, and come back to work in November. Unfortunately, over the last decade, this strategy was effective less than 50% of the time and there were years in which substantial gains would have been forfeited. As one strategist stated, “any investment strategy that you can summarize in a rhyme is probably a bad strategy.” One interesting note from the graph below which shows equity returns by month, does make the point that September is the worst month for equities. That certainly occurred this year as many of you noted the decline in value on your investment statement.

You should only buy stocks in companies that you understand.

Peter Lynch was the legendary manager of the Fidelity Magellan Fund that generated wonderful returns in the 1980’s. He was known as a “story" investor. That is, each stock selection was based on a well-grounded expectation concerning the firm’s growth prospects. The expectations are derived from the company’s "story"-- the more familiar you are with a company, and the better you understand its business and competitive environment, the better your chances of finding a good "story" that will actually come true. For this reason, Lynch is a strong advocate of investing in companies with which one is familiar, or whose products or services are relatively easy to understand. Thus, Lynch says he would rather invest in "pantyhose rather than communications satellites," and "motel chains rather than fiber optics." If that last quote sounds dated, it is as it was in his book written in 1994. Although I don’t know if I know more about pantyhose than communication satellites, I do know there are many companies that I do not really understand that have been outstanding investments this year. Consider the following companies, Amazon, Disney, Nvidia and Fortinet.I suspect you have a good idea what Amazon and Disney do and know their investment stories. They are excellent companies. You may not be so sure about who Nvidia and Fortinet are and what they do. I could try to provide you a summary and would most likely confuse you. However, the year-to-date stock returns of these companies are clear:
Fortinet +129%
Nvidia +127%
Amazon +8%
Disney -3%
|
Rather than rely on folklore and myths, we believe using time-tested strategies along with disciplined processes will help you make progress toward your financial independence. That being said, if Deb and I are going for a walk tonight and a tree comes between us, we will shout “Bread and Butter” because I sure want to avoid a quarrel.

Disclosures

• Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

• Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.

• All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.