Much has changed since we last visited. At that time, it ap- peared that stocks had bottomed and were off to the races, but we couldn’t be certain. Now we can be. In fact, the S&P 500 bottomed on March 23rd, declining almost 34% from its all-time high on February 19th. The ensuing rally, which stalled out a bit in early June, has been nothing short of spectacular. At its June 8th peak, the index was up over 44% from its bot- tom, nearly recovering all that was lost.
For the 2nd quarter, the S&P advanced nearly 20%. That paled in comparison to the NASDAQ, which was up more than 30%. The divergence between the two is meaningful. The NASDAQ is more heavily inﬂuenced by large Technology companies like Amazon, Apple, Microsoft and Tesla, all of which were up more than 20%.
Big Tech companies have clearly been COVID-19 stock market winners. Some argue that their stock price out- performance is justiﬁed, given their positioning in this new economy. Per- haps this is so, but likely not to this extent. Signs of excess speculation are emerging, and it is possible these high ﬂiers return to earth in the 3rd
are more likely to succeed if they can identify the one thing that they do best – their “Hedgehog Concept.”
The story was also loosely adapted into a cartoon in the 1960s as The Road Runner Show. Any reader that watched Saturday morning cartoons no doubt recalls this interpretation of the parable. In the series, Wile E. Coyote devises elaborate schemes to capture the speedy Road Runner. Mr. Coyote’s business card even lists his title as Genius. While the many methods of entrapment he devises could be considered ingen- ious, they never manage to ensnare Road Runner, for Road Runner’s one big thing (his speed) is mightier than the many things Mr. Coyote employs.
Tandem is a hedgehog. Our one big thing is to be the best in the world at providing market-like or better returns over a complete market cycle with a less vola- tile, more consistent experience for investors. We
seek to reduce risk when the odds appear to be against us, and add to risk when the odds seem in our favor. We will leave it to those we serve to determine whether we have attained our goal. But it remains our primary motivator and our one big thing.
Our hope is that this approach limits the stock mar- ket’s impact on our clients’ portfolios during turbulent times, allowing our clients to stay invested through a market cycle. We believe that if we can achieve this, then our clients have a better chance at investment
success. As we wrote in our January Commentary,
staying invested is the key to investment success, and limiting volatility is the key to staying invested.
Volatility in the market makes investors want to do the wrong thing at the wrong time for the wrong reason. When prices are high and rising, as they have been of
late, most investors perceive risk to be declining. The reasoning apparently is that the market has it right, prices are rising, so risk is declining. This false sense of security causes investors to buy when prices are high.
Conversely, risk is perceived to be increasing when prices are falling. Obviously there is a reason prices fall, but generally speaking, the same company at a higher price carries more risk, not less.
Think of a market cycle. As prices soar and continue to hit new highs, enthusiasm for stocks increases. This can be measured by the amount of money ﬂowing into the stock market. Historically, inﬂows increase at or near market tops. In other words, the market is at its riskiest the last day it hits a new high.
And then prices fall. Investors begin to sell stocks, and the selling accelerates with the steepening of the de- cline. Perceived risk has increased. Real risk has not.
Yet outﬂows are their greatest at or near market bot- toms.
Market volatility can create false perceptions of risk. This causes investors to ultimately buy high and sell low, never experiencing the true returns of the mar- ket. The foxes in the stock market have many tricks to employ to try to do better next time. But they are com- monly reduced to trend following and timing. Neither of these appears to us to be repeatable or sustaina- ble.
For reference, let us consider the hypothetical invest- ments charted above, noted as A and B. Both invest- ments have identical beginning and ending values. They start with $100 and ﬁnish with $200. Similar to the tortoise and the hare (not to mix parables), A runs
(Continued on page 3)