Finding Value in an Upside Down World – ValueWalk Premium
Upside Down World

Finding Value in an Upside Down World

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Q2 2020 hedge fund letters, conferences and more

When the world turns upside down, the best thing to do is turn right along with it.” – Mary Poppins

Is Mary’s advice proper when it is your hard-earned wealth at stake?

Investors are living in an upside down world. A speculative frenzy fueled by extreme monetary policy is sending stock markets to all-time highs and bond yields and spreads to record lows. At the same time, a global recession is raging, and social unrest is worsening by the day. A pandemic is still having a significant effect on our lives.

Maybe investors are just an optimistic bunch and able to look beyond the current problems. However, it could be that investors are again falling victim to greed and cannot see the bigger picture.

More bluntly, they cannot see the risks for the hope.

Another consideration is that desperate times call for desperate measures. Despite no visibility into the future, investors are frantic to own anything offering a positive return with little regard for the embedded risk.

In this piece, I quantify the upside-down world in which stock investors find themselves in. Does it make sense? Absolutely not, but as I will show, a strong understanding of market dynamics exposes some valuable gems. When the time comes, these stocks will make playing defense productive.

Market cap is all that matters

The major stock indexes sit at record highs despite a large swath of their underlying stocks plodding along. The gains of the indexes are superficial, a mask of sorts, resulting from the outperformance of the largest companies.

The S&P 500 and NASDAQ are market-cap-weighted indexes, meaning the largest companies contribute proportionally more to the index than the smallest. To be specific, and as shown below, within the S&P 500, the largest 100 companies account for 72.77% of the index. The smallest 200 only accounts for 6.67%. If those smallest 200 stocks all went to zero tomorrow, the S&P 500 would only decline by 6.67%.

Upside Down World

Read the full article here by Michael Lebowitz, Advisor Perspectives

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