Anyone who has been reading our Insights and “The Quarterly Report” for a long time knows that I love sports. I especially love college basketball, which is easy to do when you are born in the middle of what college basketball fans refer to as Tobacco Road. Readers are also aware that my favorite team is the Wake Forest Demon Deacons.
It has been a tough few years to be a Deacon fan, but this year there is hope. Wake hired Danny Manning as the new head coach of the Wake Forest basketball program, and for the first time in a long time, the future appears bright. Last year at this time the Deacons had won 11 games and lost five, while this year they have won nine games and lost eight. This year they are a much better team.
That may seem like a strange comment to some, since 11-5 is a better record than 9-8, but while the record may be the headline (and to some the bottom line), it doesn’t tell us everything. Last year’s team played a very weak schedule up to this point. This year’s team has not run away from any challenges. More importantly, however, this year’s team is getting better with every game. They learned from those losses and they are improving. Last year’s team had potential, but time and time again failed to live up to that potential. They did not improve and from this point on in the season won only five more games and lost 10. The future is always uncertain, but that does not seem very likely to happen again this year.
Headlines are often misleading, and that is certainly true in investing. Throughout 2014 we kept hearing about the major market indices reaching record highs. Many people then believe that means the market is doing great and it is a wonderful year, but that is not entirely true.
It was a good year for the S&P 500, which ended up 4.93 percent, but that is just the average of the 500 largest companies in the U.S. and even that average is skewed by the few who did really well. Small company stocks did end the year in positive territory, but they were up only 4.89 percent as based on the Russell 2000 index. International stocks were negative for the year, with the MSCI EAFE Index ending the year down 4.48 percent. Over the last six months international stocks are down 9.16 percent, while small company stocks are up only 1.65 percent over that time period. Bonds have been flat, returning 1.96 percent for the last six months based on the Barclays Capital U.S. aggregate bond index. The Merrill Lynch High Yield index is showing a loss of 2.94 percent.
Under the surface of a few headline indices, 2014 turned out to be not such a great year. Unlike basketball teams, that does not mean more losses ahead. In fact it is often the opposite in investing. Not-so-great returns often provide better opportunities. Remember, the stock market is simply a store, and when prices go down, the merchandise becomes more attractive to buyers.
The year 2015 starts out with what appears to be some fantastic long-term opportunities in areas like energy-related companies where the market has overreacted. So maybe the stock market is like my beloved Deacons: the 2014 season ended with a record that was worse than it appeared on the surface, but the future appears bright.
Happy New Year!
Chuck Osborne, CFA