FOLLOW-UP #3 ─ SUMMER 2024
Hi, (that’s E-mail for hello), here’s more stuff. And don’t worry, I’m still going “weak”. Let’s skip the preaching ─ well, not exactly. It just comes later.
We’ll start with the charts which graphically illustrate the text.
The meat of this update is a 38 year S&P 500 vs Nasdaq 100 Comparison.(A) The other main section is about agile thinking, with examples of how major decisions were affected by personal, not practical, factors.(B).
I’ve maintained manageable positions in our Smart Beta Small Cap Value ETFs ( RWJ > EZM > PRFZ > EES). The next follow-up will explore their performance vs. comparable Small Cap Value ETFs.
“Hors D’Oeuvers” has some significant material, with some whimsy (?) at the end.
Can you tell the truth and still lie? The BONUS explores that.
To your wealth,
Marty
P.S. What is the most rewarding day of any stock investors life? THE DAY HE/SHE REALIZES THEY CANNOT BEAT SPY OR QQQ. (It took me more than 40 years.)
Summer 2024 Charts
Chart #1: Logarithmic
SPX vs NDX Jan 1986 - Jan 2024
SPX and NDX 38 years. Parallel NDX-SPX lines would indicate equal growth. Note the consistently widening gap between indexes, indicating NDX superior growth is ongoing. Adjusted data seen in Table 1. and described in paragraph 4 is more accurate, but equally determinate.
Chart #2: NDX Jan 1986 - Jan 2024
NDX (i.e. QQQ) 38 years. Charts 4 and 5 detail bubble and price aberration.
Chart #3: SPX Jan 1986 - Jan 2024
SPX 38 year performance. The 1995-2000 ascending bubble was a CONVEX CURVE. That indicated a controlled advance, with the rate of price growth DECELERATING.
Chart #4: NDX Bubble 1995 - 2000
The CONCAVE CURVE of NDX bubble of 1995-2000. The increasingly upward bend of the ascending bubble indicated the rate of NDX price increase was ACCELERATING. It was screaming “bubble”, and I missed it.
Chart #5: NDX Aberration March 2020 - March 2024
In contrast to the 95-00 experience, NDX from 2020-2022 had a modest upward price aberration.
(A)
*S&P 500 VS. NASDAQ 100 (NDX = QQQ)
The simplest way to compare the S&P 500 (SPX) and the Nasdaq 100 (NDX) indexes is to begin at the 1/86 origin of NDX, and go 38 years to the present, 1/24. Chart 1., 2., and 3. [Spoiler Alert – NDX (aka QQQ) wins by a knockout in the first round.]
Please keep in mind, except for the .2% QQQ management fee, NDX (an index ) * AND QQQ ( an ETF – Exchange Traded Fund) HAVE EXACTLY THE SAME COMPOSITION ─ both composed of the cap-weighted largest 100 non-financial Nasdaq stocks.
*A stock index is a non-tradeable hypothetical portfolio. It becomes tradeable in the form of ETFs and mutual funds.
There are two reasons for choosing NDX, and not QQQ for this comparison. First, we gain an extra 13 year period of Nasdaq 100 observation ─ from NDX origin in late 1988, to when QQQs became available in 1999 (Chart 2). Second, QQQs were initiated well into the tech bubble of 1995 to 2002, (Chart 4) and comparisons of QQQ to SPX from 1999 to 1/2024 would show a skewed picture of NDX performance over the past 25 years.
Raw data was adjusted to reflect actual investor experience by adding 1% compounded to SPX (the SPX dividend advantage) and subtracting .2% compounded from NDX (the QQQ management fee). Management fees of the various SPX ETFs are very low, and were not included in the calculations. [ Note: Both the NDX and SPX adjustments favor SPX.]
The adjusted data shown in the first blue line in Table 1., clearly demonstrates the 38 year superiority of NDX over SPX.
It is also important to evaluate NDX and SPX performance over shorter periods. The clincher is their comparative performance over various time spans from 1986 to 1/1/24. As shown in the Table 1., SINCE 1986, THE ANNUAL PERCENT OUTPERFORMANCE OF NDX OVER SPX HAS CONSISTENTLY INCREASED AS THE TIME OF EVALUATION TO THE PRESENT HAS SHORTENED ─ From 3.9% over 38 years to 6.7% over the last 5 years. Remember, what we are talking about here is the difference between SPX and NDX adjusted returns.
Table 1. also shows the growth of $100 in NDX and SPX from 1/86 to 1/2004. Adjusted data shows NDX returns nearly 4 times SPX over 38 years, and is accelerating in recent years.
Caveats: 1. Investor interest in Artificial Intelligence could be significant factor in recent NDX performance. Charts 2. and 3. are 38 year logarithmic views of NDX and SPX. The massive tech bubble of 1985-2002 was arguably the most significant major index retracement since 1929 (Chart 4) . That was followed by an 80% NDX decline. SPX had a gentler decline of 50%.
Contrast the above with recent experience. In 2020-2021 there was a modest upward deviation in NDX trajectory: That was followed by a 12/1 to 10/22 bear market that in no way replicated the excruciating 2000 experience.
By April, 2024 the NDX had returned to the upper portion of the trend channel of 2010-2022. (Chart 5).
Caveat 2. NDX represents the 100 most innovative, largest, and fastest growing companies in today’s economy. How long will that last? Sorry, my crystal ball is broken. The steadily increasing superiority of NDX vs. SPX must end at some point. When that happens, I believe that, while not increasing, NDX will continue to outperform SPX.
Caveat 3. There is an important exception to this recommendation. For investors with limited assets who are at or nearing retirement, the conventional portfolio is more appropriate.
Evidence presented here indicates that, at this time, NDX (ETF QQQ) is superior to SPX (ETFs SPY,VOO, etc.) as a broad index investment vehicle. The increasing rate of NDX returns over SPX, as periods closer to the present are measured, reinforces that conclusion. Every portfolio should have a very substantial position in QQQ.
(B)
WHAT DO THESE 4 SITUATIONS HAVE IN COMMON?
1.In the 1930’s and 40’s the MAYO CLINIC, in Rochester, Minnesota, was renowned for performing an operation for stomach ulcers called gastroenterostomy, where a portion of the small intestine was attached to the stomach. Late in that period, it became clear that another operation ─ subtotal gastrectomy, which involves the removal of 2/3 of the stomach, was a much better treatment.
2.In 1976 JACK BOGLE , at Vanguard, introduced the world’s first index fund, the Vanguard S&P 500 Index Mutual Fund. That was a monumental achievement. In 1992, Nathan Most, a physicist, designed ETFs. They were an even more significant achievement. Most initially offered the concept to Bogle, who rejected the idea after finding minor flaws and opining it would be a vehicle for excessive trading in and out of the S&P 500.
3.Although the covid pandemic started in CHINA , the country was never able to develop a truly effective vaccine. Xi Jinping, the country’s leader, mismanaged the problem by ordering prolonged crippling lock-downs and not buying American vaccines, which were very effective and were available.
4.Wall Street dogmagogues are addicted to the 60% stock 40% bond portfolio, with its annual rebalancing and “rainy day reserve” companion. The radical idea of always being 100% INVESTED IN BROAD STOCK INDEX ETFS is anathema.
1. The Mayo clinic was famous for gastroenterostomy. They eventually accepted a “better way”, although that would eclipse their eminence in that sphere. [The Mayo Clinic was, and is, an outstanding medical institution. I had the honor of speaking there in the late 80’s.]
2. Jack Bogle was a TRUE INVESTMENT ICON. Very likely to preserve his Index Mutual Fund legacy, he found reasons to reject the ETF concept in 1992. As a result, the first ETF, SPY (the S&P 500), was introduced in 1993 by State Street Global Investors (SSGI). ETFS WOULD EVENTUALLY SUPPLANT INDEX MUTUAL FUNDS. Bogle retired from Vanguard in 1996.It wasn’t until 2001 that Vanguard introduced its first ETF.
3. Buying effective American vaccines was an obvious solution for China, but, in that situation, would have been an admission of a rival’s superiority. The Chinese leader chose to not “buy American”, and grossly mismanaged the pandemic. We will never know the truth about Chinese deaths, but we will always know pride over reason was responsible for many of them.
4.The first three situations involved a person or entity delaying or never accepting a major advance. In each case, REPUTATION PRESERVATION guided that decision. The fourth example is a 180 degree turn. An individual with no reputation or credentials is proposing what he believes to be a positive radical departure from convention ─ AN ALL-IN BROAD INDEX ETF PORTFOLIO. (Is that the definition of chutzpah?) Here’s the reasoning behind that. Market history tells us, over any reasonable period, the approach I’m recommending will outperform the venerated 60-40 stock-bond allocation.
There is no chance my ideas will catch on. Too many people have too much invested in what I call “asset dislocation”. And for an advisor recommending this approach, a crippling bear market ( i.e. 1974,2000,2009) would spell disaster. Staying with convention is really about Self Preservation. There is also an element of Reputation Preservation here: Any advisor endorsing this “bizarre” idea, even in “good times”, would invite Reputation Obliteration.
I have the luxury of not being in business. (“Nothing to sell ─ Something to tell.”) The family whose assets I manage has seen the fruits of my approach. They could tolerate a serious (but invariably temporary) depressed period, and enjoy the eventual recovery. Unless all market history is abrogated, our family garden, over time, will remain lush.
About 35 years ago I stood next to Tony Bennett at a urinal in LaGuardia airport. I remember it like it was yesterday. Anxious to make contact with him (verbal, not physical), I said “you know you’re old when it takes longer to start than to pee”. He responded, with the mellowest voice I’ve ever heard, “you gotta go with the flow”.
That’s what the first three examples of Reputation Preservation are all about ─ “going with the flow” ─ and that’s why I told the Anthony DiBenedetto story. Don’t swim upstream. Be flexible and and don’t be afraid to adopt to a better way. Or better yet, have switching done for you. (See below).
(Related info: The original Dow Jones Index, created in 1885, had 13 components ─ 11 Rails, 1 Steamship Co., and Western Union. In 1896 they became Industrial and Transportation Indexes. Like every major index, they have responded to changing economic conditions by changing components. They “go with the flow” and index investors are automatically kept current.)
In these examples Mayo belatedly went with the flow, and Bogle and Xi did not (to their detriment). Alas, my investment ideas are just a trickle that will never become a stream.
HORS D’OEUVERS
1. Sam Eisenstadt was chief statistician at Value Line for 63 years. He created the Value Line rating system, which was very productive for many years, but since 2000 has trailed the S&P 500. I knew him for more than 50 years ─ several phone calls each year and a rare personal meeting. Sam died in 2020 at age 98, and I miss our casual friendship.
Each week Value Line recommends differing percents of one’s assets to be invested in stocks. I asked Sam on a number of occasions if an investor would have been better served with 100% in all the time. The question was never answered. Oh, wait-a-minute ─ the non-answer WAS an answer. (Late thought: Actually, Value Line not recommending 100% in stocks is another example of Reputation Preservation ─ and a disservice to its investors. How about recommending a 100% Broad Index Strategy? That would be the equivalent of them saying “ you don’t need us anymore”.)
2. Ask investors how they are doing in “the stock market” and the response will only refer to the stock portion of their portfolio. A realistic answer should include stocks, bonds, and private placements (which are a major No-No). The question should be “how is your money doing?”
3. In the winter follow-up, I called QQQs a new kid on the block, though they have been available since 1999. This time there is a NEW “new kid on the block” ─ an actively managed , not Smart Beta, small cap value ETF, AVUV. Since its inception in 9/2019 (<5 years) it has underperformed QQQ and RWJ, and outperformed PRFZ, EZM, and EES. Most remarkably, it has 11B in assets. RWJ , our largest SBSCV ETF, has only 1.5B in assets, and has been around more than 3X as long.
I haven’t bought it for several reasons: Its short time since inception, QQQs superior performance, my belief that smart beta SCVs will outperform actively managed ones ( if this is the outlier, I missed it), and it is in a subsidiary company of American Investors, which has had dismally performing mutual funds since the early ‘70s.
4. I have a personal rule not to buy any investment entity that is widely advertised. Many, many years ago utilities were in vogue, and a number of utility mutual funds appeared. In “the precious metal rush”, gold went from 166 in 1978 to 843 in 1980, and gold ads were ubiquitous ─ as they are now. From 1977 to 1980 platinum went from 145 to 1040, as part of the commodity binge. [ Note: Historically, investments in precious metals have not been rewarding.] All of these investments eventually obeyed the law ─ of gravity.
I know what you’re thinking ─ How about QQQs? QQQs are the most widely advertised stock ownership entity, and yet I’m essentially all-in on them. (The S&P 500 Index is the most widely held stock index ETF entity.)
Explanation: QQQs ads have been an advertising company’s feast for many years. What we haven’t thought about is Invesco is the only Nasdaq 100 ETF provider. Its flagship ETF is QQQ ( aka NDX). It’s assets are .27 trillion. In contrast, the S&P 500 has at least $1.7 trillion indexed in many different ETFs. Competition explains the negligible SPX ETF management fees. Fidelity has an annual S&P 500 ETF management fee of .015%, or 15 cents on $1000. Contrast that with the .2% QQQ fee, which is 13x the S&P 500 fee.
The steady stream of QQQ ads is not surprising ─ Invesco makes 540 million dollars (!) in QQQ management fees each year, and that leaves plenty of spare change for advertising.
Invesco has another UNADVERTISED NDX ETF. QQQM has the exact same portfolio as QQQ. The management fee is .15% ─ 25% lower than Qs. That’s only 10x the low fidelity SP 500 ETF. QQQM, not QQQ, should be your vehicle for owning the Nasdaq 100.
Fees aside, QQQ outperformance vs. S&P500 renders the higher management fee insignificant. Any QQQuestions?
5. I had not heard of Nvidia 3 or 4 (or 2) years ago. Now it’s 6% of assets I manage. Thank Q, QQQ. And when the next Nvidia comes along, I’ll have a substantial position in it. Thank Q, QQQ. (OK, Let’s not talk about Tesla!)
6. Why do Warren’s companies do so well? Ans: Berkshire HATH A WAY! (I know, should have quit at “Thank Q”).
BONUS
HOW TO TELL THE TRUTH AND STILL LIE (OK, DECEIVE)
Chart 6., distributed by Nasdaq, compares NDX Total Return to SPX Total Return from 12/31/07 to 3/31/23. The chart is deceptive in two ways: On the chart’s start date NDX and SPX were aligned to produce an annual result favorable to NDX, and the ARITHMETIC chart used gives the appearance of a much steeper rise than was actually the case. That led me to investigate how NDX-SPX prices on various dates could be manipulated to enhance or diminish NDX performance.
As we know, the giant NDX bubble started in the mid-nineties ( Charts 2. and 4.). The NDX top, in 3/2000, NDX was 4816. Its low was 795 in 10/2002 (a >80% loss). During that same time period, SPX went from 1553 to 769 (a 50% loss). In the 24 year period from NDX and SPX highs in 3/2000 to 3/2024, adjusted NDX gained 5.71% annually, and adjusted SPX annual returns were 6.21%. DISMAL NEWS.
Calculating NDX vs. SPX from their lows in 10/2002 to 4/2024 ( adjusted figures), NDX was up 15.5% and SPX was up 10.35% annually over 21.5 years. HAPPY DAYS ARE HERE AGAIN.
Let’s face it ─ I’m talking about the most radical major index price swing in the past 95 years. It’s an extreme example of how choice of index date can vastly distort long-term results. Lesser examples of honest, but devious, “distortion by date” are much more common.
Chart #6: Nasdaq QQQ vs SPX 2007 - 2024
An ARTHMETIC NDX chart distributed by NASDAQ. The chart is honest, but deceptive in two ways. First, it was initiated at a time when NDX and SPX were aligned to produce an annual result favorable to NDX. Second, the NDX price rise after 2018 appears greater than was the actual case. LOGARITHMIC charting (Charts 1 and 2) would show a more realistic, but still impressive, rise.