No Easy Bull

"Things will never be the same. Risk taking has been destroyed." “Another leg down.” "Banking Institutions are Insolvent. S&P will drop to 600 or lower." “It’s a bear-market rally because we have not yet turned the economy around.”

Follow any of the links in the quotes we’ve provided above and you’ll find they were all made by pundits in a two-month span beginning 12 calendar days before and a month and a half after the March 9^th, 2009 global bear market low. Perversely, this was your best buying opportunity—at the precise point when the prevailing sentiment was, “It’s different this time (for the worse, that is).” As a result, few investors actually bought. Now, though, it seems there is a new mantra: That since the last five years' have seen little disparity of returns, investors have had something of a straight shot up. Now, they argue tight correlations seem poised to widen—a challenge for investors. Suffice it to say, we disagree.

The story goes like this: Because the majority of stocks have gone up during this bull, even a monkey could have done well. No need to pick “good” stocks if they’re all going up! Fair enough. But it isn’t exactly breaking news that most stocks rise in a bull. If the market is up 177% in five years, it largely goes without saying that most constituents are up. But that doesn’t mean easy gains! While the global market’s rising tide may have lifted almost all boats since March 9, 2009, to reap the rewards, you had to be in the boat—for many investors, that was the opposite of easy.

For starters, when the bull began in March 2009, many investors, rattled by quotes like those above, were heading for the exit. “Stocks going to zero!” was the fear du jour. Consider what we’ve had since then: Depression fears gave way to double-dip chatter; double dip to a tug of war between 1970’s hyperinflation and Japanese deflationary stagnation talk. Debt fears that morphed from almost anything in early 2009 to Dubai later that year. Then Greece. Portugal. Ireland. Italy. Spain. Muni bonds. Detroit(!). Puerto Rico. Fears the eurozone would be torn asunder; or its recession would be contagious. Much like fears over Swine Flu! Or Emerging Markets’ currency weakness being contagious. Revolutions in Egypt, Tunisia and Yemen. Civil War in Libya and Syria. Turkish turmoil! Venezuela being Venezuela and Argentina Argentine. (Oh, and that 2010 mess in Honduras.) Eyjafjallajokull. The Japanese earthquake and subsequent nuclear fears! The typhoon that swamped the Philippines; Hurricane Sandy. The fiscal cliff, a credit rating downgrade, two big debt ceiling battles and a government shutdown in the US. Unpopular legislation. Overregulation fears. Russia invading the Ukraine. Shall we continue?

Capturing this bull market’s gain since March 9 required nerves of steel—something studies show most humans lack. Emotions are powerful, and judging by ETF and equity mutual fund flows, a fair amount of investors cried Uncle at least once, and some didn’t return to stocks at all after 2008.

Stock investing is never easy money—if it were, everyone would do it, and everyone would win! Some say it’s about to get even less easy thanks to falling correlation between stocks in the S&P 500—more variable stock performance makes stock picking paramount.

Color us perplexed. In a bull market, if you have an adequately diversified portfolio, you’ll get roughly market-like returns—maybe a bit higher, maybe a bit lower, but in the neighborhood. If all sectors and major geographic areas are represented, and the broader market is up, it’s highly unlikely you pick only stocks that go down. Finance theory tells us asset allocation—whether you are in stocks, fixed income, other securities or cash—is the single biggest determinant of returns. Studies show it can be responsible for as much as 90% of your return. Stock selection contributes the small remainder. This doesn’t mean we think stock selection is worthless, but it’s not likely to make or break your portfolio if you’re adequately diversified across sectors and countries and aren’t over-concentrated in any one stock. If no stock represents more than 5% of your portfolio, no one company will move the needle—the totality will determine your return, not unlike the market itself.

Maybe there is more dispersion in returns between stocks moving forward and maybe there isn’t. But there is plenty of dispersion in returns among investors, professional and amateur alike, driven by much more important, higher level choices so influenced by behavior.