History Will Repeat Itself
Growth stocks will be the winners
"History doesn't repeat itself, but it rhymes".
One of the great lessons that all of us investors encounter, and that we don't learn until we pass it, is that history repeats itself over and over again. It is a big cycle, with small internal cycles, where the psychology of the participants is also cyclical.
The stock market is the only place where no one wants to buy when there is a sell-off, and when the price goes up, everyone wants to buy. This means that two-thirds of investors globally underperform the Russell 3000. This fact justifies the fact that 40% of stocks globally have a negative 30-year return.
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We must all ask ourselves, is it really worth picking stocks and waiting more than half our investing life knowing that 40% of stocks are going to underperform? For this, it is infinitely better to buy an index since you know that you are going to choose both the good stocks with a higher % and the bad ones with a lower %.
A really curious fact is the distribution of the results of all the shares of the indexes. As with everything in life, the distribution is asymmetric.
It seems ridiculous to try to beat the indices. In terms of risk management, it also seems ridiculous to try to guess which stock will be the winner in the next 30 years.
Many investors have just moved the vast majority of their wealth into cash. As of today, with the S&P 500 20% below its ATH, it seems silly, doesn't it? Hence, we know that history will repeat itself. Those investors who are the ones who have taken advantage of these declines to buy more will be the few who will (very) benefit.
When we have bottomed out, and the indices go back up, what will happen, as always, is that higher growth stocks will grow more than value stocks for a number of reasons:
They have been hit harder by the recession than value stocks.
They have historically been shown to perform much better after a downturn.
If we look at the case of one of the assets most closely related to growth stocks, Bitcoin, the same is true.
A few days after the moment when there are more long-time holders than short-term holders, Bitcoin makes a floor, and from that moment on, it starts to grow exponentially, and there start to be more long-time holders in the market. Why? Because more people are beginning to understand the benefits of holding this type of asset.
We do not know if we have already hit the ground or if, this time, history will not repeat itself, but it makes a lot of sense to start accumulating growth stocks in our portfolio. Doing what the market does not do, means having the results that the market does not achieve. If you want to be average, buy an index and wait. If you want to have extraordinary results, you are going to have to have an asymmetric portfolio.
What about interest rates and cryptocurrencies?
Since 2008 when Bitcoin was created, never before have we been in a scenario where such radical rate hikes occurred. Historically rate hikes negatively affect growth stocks, or do they?
Nasdaq was up nearly 600% in the second half of the 1990s. In 1995, Fed funds were 6%. In 2000, it was still 6%. Crypto needs to prove it can do the same.
In the short run, tech stocks are interest-rate sensitive because higher discount rates mean lower valuations. Over time, though, tech is still a growth industry, and stock prices follow earnings and revenue growth.
If crypto is also a growth industry, we shouldn’t care much whether the discount rate is 1% or 5% — starting valuations should be lower, but good tokens should still go up. It doesn’t feel that way at the moment: Crypto natives talk about macro as if it’s affecting more than just prices and valuations — they make it sound like crypto itself cannot grow if the Fed doesn’t allow it.
But maybe they’re right: Maybe price and utility are so intertwined in crypto that the industry cannot grow unless the monetary policy is easy and getting easier. Hopefully not, though. Crypto has a chance over the next year or so to show that it's a growth industry and not just a proxy for central-bank-driven liquidity.