To Our Business Partners

THE HIGH COST OF PAYING TOO MUCH

The NASDAQ Composite, especially its largest components, dubbed the “Magnificent Seven” – Apple, Amazon, Alphabet (Google), Facebook, Microsoft, NVIDIA, and Tesla – have been in the news a lot over the last couple of years, attracting attention to their steep price increases.  Despite the stellar performance, one statistic has gone largely unnoticed: the NASDAQ’s long-term performance.  Looking back to the year 2000, when it was also all the rage as technology stocks were going to grow to the sky based on optimism over the internet, The Herd overlooked the extreme valuation statistics. 

At the same time, small and medium-sized company stocks, as measured by the Russell 2000 stock index, were selling at near historically low multiples of earnings, sales, book value, dividends, and/or cash flows.  Many of these sold at single-digit multiples of earnings and were largely ignored in the marketplace.

When you put the NASDAQ’s recent rise in perspective, relative to the rest of the market, an incredible event just occurred.  After TWENTY-FOUR years, since the peak in the Y2K technology stock mania, the seemingly high-flying NASDAQ index has JUST NOW caught up to the seemingly laggard and unpopular Russell 2000 small-company index.  To boot, the NASDAQ still trails the other popular small-cap indexes by roughly 75 percentage points over the last 24 years.  This happened despite “investors’” love affair with all things tech and Artificial Intelligence as represented by the NASDAQ index and “Mag 7.” 

How can this be?  It’s quite simple.  One group of stocks (NASDAQ) was significantly overpriced, while small and medium-sized companies (Russell 2K) were selling at very low valuations. Overpaying for any financial asset can often take years to recover from and yields unsatisfactory investment returns.  This is why Your Money Managers are such sticklers on valuation.  It’s worth repeating:  What you pay for what you get is a critically important factor in determining the ultimate return on your investment capital. 

PORTFOLIO VALUATION 

Our group* of widely held stocks is selling for nearly 100% of combined estimated value, possibly the highest in our 31-year history.  We can’t catch a break from Mr. Market.  He continues to offer us unacceptably high prices for stocks so, NO, we’re not interested in more aggressively buying.  Meantime, cash seems like a safe investment while we patiently wait for Mr. Market to come back to us with lower prices for good merchandise. 

RECENT RESULTS

In October all of the market indexes experienced declines, all relatively minor, with the smaller company indexes declining 1-3%, while the large company indexes were off by 0.5% to 1.5%. Year-to-date, large–cap indexes continue to lead, with the S&P 500 and the NASDAQ Composite up about 21%, while the small/midcap indexes are up 8–10%.  Over the last 12 months, large cap indexes continue to dominate, up 38–40%, while the smaller company indexes are up 30–34%. All of the last 12 month numbers have benefited from coming off a significant decline in prices during the August through October time period of 2023.  Lack of broad participation by most stocks continues to be a concern.  Our group* of portfolio stocks is currently performing more in line with the small and midcap indexes, which is just fine. 

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.