One privilege among many of working at Hedgeye is ready access to vast reservoirs of data, including those needed to ponder sensibly a key quandary confronting stewards of long-term capital.
The quandary: Given the huge opportunity costs of missing stocks' "best" days, it seems perilous at best for stewards of long-term capital to exit the stock market — materially or wholly — with the aim of re-entering when stocks' expected returns have risen to more attractive levels.
Make no mistake, such opportunity costs have been huge historically.
To wit: $1 invested in the S&P 500 from its inception in 1926 through year-end 2022 would've grown to $226 (with dividends reinvested); remove the 10 best days (out of ~24,000!) and the terminal value falls by nearly two-thirds — to a relatively paltry $75.
Clearly, buy-and-hold is the only rational policy for stewards of long-term capital. Ain't it?
Wait: Reinsert the 10 best days while removing the 10 worst days, and the terminal value rises to $741 — more than three times that produced by buy-and-hold. Perhaps "market timing," or at least a concerted effort to sidestep major anticipated downturns, makes sense after all?
Wait: Isn't it also true that the best days for stocks unfold not during bull markets but rather during bears?
Indeed it is. Of the 10 best days (defined by percentage price moves for the S&P 500) since its inception, all 10 occurred during bear markets (defined as epochs in which the Index slumped at least 20% below its all-time high without regaining it).
Perhaps needless to say, all of the Index's 10 worst days also unfolded during bear markets as just defined.
And — crucially — an investor who missed both the 10 best and 10 worst days but was otherwise invested fully in the S&P 500 over its entire history through year-end 2022 would've notched a 245x increase in wealth: ~9% more than the buy-and-hold increase of ~225x flagged above.
What to make of all this? Lots, including potential policies and strategies I'll be exploring during my breakout session at Hedgeye Live, and in the new service I'm privileged to be building for Hedgeye subscribers: Capital Allocation (CA).
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Editor's Note: If you'd like to lay hands on info about CA, you can email support@hedgeye.com. We will keep you posted on the product launch. |
