One reason people consistently underestimated the strength of the stock market and the economy in recent years is that they relied on some old, usually reliable rules of thumb, asserts Bob Carlson, editor of Retirement Watch — and a participant in The Interactive MoneyShow Virtual Expo from May 11-13. Register here.
As Howard Marks, of Oaktree Capital Management, pointed out in a recent investor letter, many people were taught to believe in reversion to the mean, or that what goes up must come down. While often true, it isn’t always the case. And, sometimes, it takes a long time for the decline to come.
The Federal Reserve continues to support markets. And today’s fast-growing, dominant companies will continue their strong growth until governments change the rules or more innovative firms replace them.
We haven’t had high inflation despite all of the Fed’s money printing since 2009, because other factors changed and held down prices. It has been different this time. Yet, many of those factors are changing again, and that’s why I’ve been recommending inflation hedges the last couple of years.
It is important to know history and have respect for its lessons. But, it is also important to pay attention to changes and potential changes that might make this time different.
Late last year, we added value stocks through Oakmark (OAKMX). Many stocks that didn’t benefit from the pandemic rally were cheap. The returns of their companies were poised to surge as economic activity increased. OAKMX lagged in recent years as investors preferred growth stocks over all others.
But as investors rotate away from the highly valued growth stocks, they are buying the stocks Oakmark owns. Oakmark is delivering strong returns and leading most mutual funds.
The fund returned 13.40% over three months and 18.58% for the year to date. To give you an idea of the outsized 52-week returns I mentioned, the fund is up 73.77% over the last 12 months.
Oakmark has a unique value investing strategy. Some of its holdings are what many consider to be growth stocks. The fund uses different methods of valuing various types of businesses.
It recognizes that a manufacturing company should not be analyzed the same way as a software or streaming company. This methodology allows it to buy growing companies selling at reasonable prices.
The fund owns only 57 stocks, with 32% of its portfolio in the 10 largest positions. Top holdings recently were Alphabet (GOOGL), Ally Financial (ALLY), Capital One (COF), Facebook (FB) and Citigroup (C). Financial services currently compose 36% of the fund, communication services account for 15.6% and consumer cyclical stocks are 14%.
