"The market has been challenging."
"The past few years have been a tough environment for stocks."
"U.S. stocks are doing badly."
I've heard these comments, in three separate conversations, over the past week. In every case, after my head stopped spinning, I either thought about the commenter's point of view, or simply asked the person what was behind the remark.
In the first case -- the person who says the market has been challenging -- it's a matter of having market myopia.
This individual works for a media company that specializes in high-growth, domestic stocks only, to the exclusion of every other asset class.
So let's dissect that argument:
The S&P 500 Pure Growth index, which tracks the 331 S&P stocks with the strongest growth characteristics, is up 7.03% year to date. That's total return, not just price appreciation.
A couple things occur to me here. First, the stock-picking services typically ignore dividends, perhaps on the assumption that traders will be in and out of the stock before the ex-dividend date. Of course, they also ignore taxes on short-term capital gains, often begging the question by claiming they know nothing about that.
Right off the bat, a calculation that only uses price appreciation will result in a more tepid return than an investor -- not a trader -- may realistically expect.
The second thing that occurred to me: The "challenging" environment my friend reports may be based on failure of her company's stock-picking methodology to keep pace with a broader index.
When you are gambling based on a list of U.S. growth stocks, you might luck out and get Noah Holdings (NOAH), whose price jumped 20% last week. But you might also have chosen badly, and ended up with Universal Insurance (UVE), Mentor Graphics (MENT) or Inogen (INGN), which shed 39%, 34% and 17%, respectively.
See, you might think, well if I pick some good stocks and some bad stocks, it all balances out and I'm a winner in the end! Isn't that the basic idea of diversification?
No, it's not.
When you are picking high-beta domestic stocks, perhaps based on a chart pattern they may, or may not, be forming, you are still concentrating on one area of one market: The growth segment of U.S. equities. It's a concentrated bet, no matter how you try to diversify into tech, health care, consumer discretionary or any sector that's showing growth at the moment.
How about the other people who were complaining about their portfolio performance in recent years? When talking to the one who said things have been rough, I asked a couple follow-up questions, and found that she had made an outsized bet on some kind of solar company -- I don't recall which one, and it doesn't matter.
That's a perfect example of something that seems "obvious": not panning out. Can't you just hear it? "Alternative energy is the fuel of the future! I want to get in early!" Sounds good in theory, right? In practice, these things may or may not work. Who knows? Nobody does, when they place their bet.
As for the argument that U.S. stocks are doing badly -- I'm not sure what galaxy that comes from. U.S. large-cap stocks are not reprising their 2013 performance, or even 2014, that's for sure. But the Russell 3000 is up 2.02% year-to-date. That index includes about 98% of the investable U.S. equity market.
Sure, it's basically a "meh," but saying that domestic stocks, as a whole, are doing poorly is certainly inaccurate.
It's interesting that market perceptions are often based upon incorrect information or poor decisions on the part of an investor or trader. It's a case when a little information is definitely a bad thing.