In the third quarter of 2020, one with remarkable overall market gains, which stock beat all the others in the S&P 1500 Composite Index?
Zoom? Apple? Netflix?
Nope, none of these, nor any of the other trendy FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google’s parent company Alphabet). Not Tesla, either.
It was Tupperware, up a jaw-dropping 345% for the quarter.
“Of course,” you might reason. “Everyone’s cooking at home this year. That makes sense.”
But consider this: the stock ramped up most dramatically in late August, after steep, double-digit declines in each of the three previous quarters.
So, keep this in mind: trying to load up on the market’s next big hit based on recent returns is more likely to hurt rather than help your effort of achieving your personal financial goals.
That’s because future returns don’t hinge on what has just happened, or even on what is expected to happen next. Rather, prices change when the unexpected occurs:
“For most investments and most investment horizons—a month, a year, five years, even ten years—the realized return is driven far more by the unexpected return than the expected return.” – Dimensional Funds
This applies to surprises like Tupperware, as well as to the supposedly unstoppable FAANG stocks of the present ("nifty fifty anyone?").
In fact, the more popular a big growth-oriented company becomes, the harder it is for it to keep exceeding everyone’s sky-high expectations. To continue outperforming its peers, it must continue to deliver bigger, better, ever more pleasant surprises. Eventually a fresh competitor steps into the ring, and the cycle begins anew.
This is how markets grow, even as the individual players come and go.
Have you ever noticed how action movie stars rarely need to defend against more than one or two challengers at a time? Even when the hero is outnumbered, the individual attacks arrive in implausibly orderly fashion. Otherwise, he or she wouldn’t stand a fighting chance.
Pundits often suggest markets are subject to an equally implausible universe, in which there’s always an orderly set of reasons for why “X” is about to soar, or “Y” is about to fall. In real-life markets, that’s just not how things work. Everything happens all at once, all the time:
- Who is going to be the next U.S. president?
- When will a COVID-19 vaccine be available?
- How is Brexit really going to roll out?
- What are China’s next moves?
- How much longer will the FAANGs keep soaring?
- What other big news is about to hit that we haven’t even seen coming?
In short, investors don’t stand a chance at guessing when and from where the market’s next helping hand or painful punch is going to arrive. This is why you should position your portfolio to harness the power of the financial markets' broad expected outcomes, rather than the reckless and unpredictable outliers that individual stocks represent.