February 2023

To Our Business Partners


and the dangers of indexing and being tied to a benchmark index.  Most popular stock indexes, such as the S&P 500, are capitalization weighted, with each stock measured by its total market value (shares outstanding times market price).  The index is then segmented by industry and economic sector.  An indexed fund is then constructed to mimic the weightings of each economic sector and industry, thereby guaranteeing similar investment performance.  Many money managers (NOT your writers!), in managing their individual accounts, also stick closely to the index sector weightings.  They want to avoid getting fired – risking their careers – by straying too far from, and underperforming, their market benchmark.

BUT, one of the side effects of this activity is that it pushes investors into the largest and often the most expensive, overvalued, and highest-risk sectors of the market. At the same time, the most undervalued and lowest risk sectors are given little attention because they become a small weighting in the index.  Little analysis is involved here since the objective is to mimic the index.  Analysis and valuation take a back seat.  This has happened numerous times over the years, as sectors move in and out of popularity.

The extremes that can be reached are no more evident than the last couple of years, with the inevitable consequences.  An examination of the largest and smallest sectors of the S&P 500 by market capitalization – the two tails – reveals the pitfalls of indexing or slavishly building a portfolio around an index.  A year ago, the technology sector consituted almost 30% of the index, while energy weighed in at a mere 2%.  Portfolios tied to benchmarks had to commit a significant portion of their capital to technology, while they could virtually ignore the energy sector due to its small weighting.

While this insured investment results which closely mimicked the index it did investors no favors.  The techology sector, of course, had a terrible year, with many of those stocks declining by 30-50% or more, while the lowly energy sector produced vastly superior returns, advancing 50% or more.  By the way, anyone who paid attention to value principles saw that techology was grossly overvalued while energy was significantly undervalued.

This is a common occurrence in nearly every market cycle over the years, as stocks and sectors go in and out of favor.  Closely following an index to determine investment parameters can be hazardous to your financial health.  Building a portfolio based on price to value, without regard to what “the market” does, pays off in a much bigger way over time.  Career risk based on going with the herd is never a consideration.


While we look for bargain prices, market participants are marking up the prices of stocks to the point where our group* of widely owned stocks now sells at 91% of value. We remain extremely patient and disciplined, as we refuse to pay up for the good merchandise on our watch list.  Human emotions eventually swing from euphoria toward disgust, so stock prices of good companies will come back our way.


Stock market indexes rebounded from declines in December. The much-anticipated “Santa Claus rally” took hold in January.  Gains were mostly in the 6-9% range, but the Dow did worse, and the NASDAQ did better – completely the reverse of 2022, during which the Dow led and NASDAQ badly lagged.  Over the last twelve months, nearly all the indexes we monitor are down 5-9%, while the NASDAQ has plummeted over 18%.   We’re pleased to report that our group* has provided a positive return in both periods discussed.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*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.