Prologue from Nick...

 

Forty years ago, the ten largest companies in the S&P 500 accounted for 10.5% of the Index’s total capitalization. Twenty years ago, that number was just over 20%. As I write, it’s 40%. Pause for a moment if you will, and just take that in. It does not seem to me to require further comment.

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We are now most of the way through a 17th year (counting from March 2009) in which the Index has compounded at 16%. Granted, this is still off the pace of August 1982 through March 2000 – nearly 18 years at a blazing 19.3%. Note the critical similarity, however: both these epic runs were born out of a decade of stagnation in which the real returns of equities were negative.

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As the equity market has risen, so have economic, fiscal, political and geopolitical risks in the United States and around the world. Still I think it can be fairly said that – as in that earlier epic run – nothing has risen further or faster than the public’s enthusiasm for speculative assets of every sort, and stocks in particular. To the point where I believe mainstream equities are now in by far the weakest hands since the heyday of dot-com.

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This is not any kind of prediction. Still less is it a market call. It is an alert. In my mind, it’s like going to DEFCON 3: “an increase in force readiness above that required for normal readiness.” We need to step up our pattern of reminding clients that markets are always exposed to the potential for significant shocks and that wealth comes to, and abides with, those who can remain steadfast with our good help. At the same time, we must avoid like the plague analyzing and addressing any particular shock(s) intellectually. Successful equity investing has always been, and will always be, a function of superior temperament.

 

“None are more hopelessly enslaved than those who falsely believe they are free.”

―Johann Wolfgang von Goethe

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