Surely you are familiar with the legend of a spring whose magical waters can restore youth. It is a fable told across cultures for thousands of years. Greek historian Herodotus wrote about it in 5th century BC while Alexander the Great was rumored to have searched for it. Countless books and movies have drawn audiences with adventures centering around the elixir. Daily, more than 1,000 people visit the Fountain of Youth Archeological Park in St. Augustine, FL – associated with Ponce de Leon – and drink from its natural spring. With no evidence of restorative power, apparently the only thing assured by taking a sip is the anything-but-youthful taste and smell of sulfur.
I am turning 50 years old this month, which is a milestone in that 50 is half of 100, and according to ChatGPT, I only have a 3-4% chance of becoming a centenarian. Years ago, President Bill Clinton commented that turning 50 gave him “more yesterdays than tomorrows.” Not exactly the uplifting message required for someone who increasingly reaches for the phone flashlight to review a restaurant menu. Maybe I should elbow my way to the front of the line in St. Augustine just in case…
Yet with age comes experience, and in some cases emotional maturity and wisdom. Professionally, I’ve been attempting to beat an equity benchmark of one sort or another for more than half of my life. Theoretically, each new investment decision I make should be influenced by the cumulative knowledge of my past experiences. Thus, by learning from mistakes, repeating successful patterns in decision making and carrying greater emotional discipline, shouldn’t I be better tooled to outperform than ever before? Perhaps I shouldn’t be so distraught about the increasing proportion of ‘salt’ to ‘pepper’ in my hair after all!
Let’s give this theory a test drive. At a level of about 6,300 today, the S&P 500® Index is at an all-time high trading above 22x forward P/E, well ahead of its 30-year average of 17x. Even stocks beyond the ten largest constituents in the Index are trading above 20x on average today. There remains a great deal of uncertainty in the world that could upend earnings growth expectations, while a handful of factors could place upward pressure on long dated treasury yields. Where do you think the Index ends the year?
A more youthful Eric might have gone out on a limb with a point estimate, a mathematical rationale and a twinkle in his eye to share his analytical response on CNBC. The 50-year-old version of myself would say: “I have no idea. Attempting to time the market is a fool’s game. Volatility is a condition of investing. On average, the market experiences nearly a 15% decline point-to-point per year, yet 75% of the time, the market is higher at year-end than where it began. If you consistently predict a market sell-off, you’ll be right for some period of time nearly every year, but you’ll miss the forest from the trees and the beauty of compounding over decades.”
How about another question. What’s the most important part of your investment process? How do you know you’ve discovered a winner? The younger me might offer an anecdote about an oil services stock that doubled in price following a meeting with the CEO where, “I uniquely read leadership’s body language and I just knew the stock would work” (let’s conveniently discard the fact that the price of oil also rose by 50% over that time). Today I would say: “We play a team sport. I have my strengths and weaknesses as an investor which I have learned from experience, as do the analysts and portfolio managers with whom I partner. The research process changes marginally each year to incorporate new thinking, but the intellectual honesty across the team will always be the most important thing. What we know and what we think we know are very different concepts. We can have an intuition of finding a winner, but even if we’re right over the long-term, market participants might vote us ‘wrong’ in the short and intermediate term. You know you’ve discovered a winner after your bull-case thesis has played out, and only then. Take nothing for granted.”
Maybe one more. What are your thoughts on the upcoming earnings season? What are the big themes? In the not-so-distant past, I would likely highlight themes such as the health of the consumer, progress in use-cases for Gen AI, and the number of times companies attempt to quantify the impact of tariffs on future-quarter guidance. While I may continue to talk about these fascinating themes (in future Equity Beats, for example), my current investor-oriented answer would be: “During earnings season, my focus is two-fold. For an existing holding, is our long-term thesis intact? And for all companies, are the long-term competitive advantages that exist (if any) strengthening, weakening or stable? Often, these two topics will overlap. Earnings season is just another opportunity to evaluate them quantitatively and qualitatively.”
Clearly, there is a risk of overconfidence once you’ve done something for a long time. A seasoned investor has seen several economic cycles, along with periods of panic and euphoria for both the broader market and individual securities. They may choose to selectively remember the successes a bit better than their other experiences. If such a manager thinks they know something but invests as though they definitely know something and repeats this exercise regularly, their clients’ capital faces outsized risk from either hubris, intellectual laziness or a combination of both. According to Morningstar, as of yearend 2024 less than 6% of active large-cap core managers have outperformed the S&P 500 Index over the past ten years. That figure painfully shrinks when going out 15 years. The margin for error, at least for this historical period has been very small. As a team of equity investors, we must attempt to neutralize our individual biases of emotion, thought and even experience in order to outperform over the long run. All that matters is the truth. Perhaps a team of investors whose ages span the decades is best positioned to both discover and execute on the truth. There are benefits to combining the energy, ambition and novel approaches of the new with the accumulated wisdom and emotional maturity of the accomplished.
One final topic to tackle today: is there a fountain of youth for investors? Asked differently, is there a secret to staying energized and intellectually engaged for the very long-run? I guess I’ll only know for sure if I’m still around a half a century from now, but I suspect the answer revolves around two themes: an insatiable intellectual curiosity and a love of people. The former is required to remain in the flow of information; the latter is required to remember that this is a team sport. I’m not sure there’s a better case study of such a partnership than Buffett and Munger.
It's time to direct the newly formed wrinkles around my eyes to the hundreds of quarterly earnings reports and calls ahead of us over the next several weeks.
Thanks for reading, and remember to never skip a Beat – Eric
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