Think of It This Way

John Noonan Uncategorized

The Uncommon Average

Since 1926, the US stock market has returned 10% a year on average, but the road to 10% has been bumpy. Returns in any given year have ranged from as high as 54% to as low as -43%. In fact, the S&P 500 had a return within plus or minus 2% points of this 10% average in only 6 of the past 95 calendar years.

This uncommon average of the stock market is similar to the uncommon average associated with LeBron James. LeBron has averaged 27 points, 7 assists, and 7 rebounds a game during his entire career. He’s played in over 1,400 NBA games in 18 years and has yet to finish a game with exactly 27-7-7.


Underperforming Premiums – Probabilities > Possibilities

The small cap, value, and profitability premiums (i.e., the expectation that certain types of stocks are likely to have higher returns than other types) are supported by a preponderance of evidence spanning nearly a century in the US and more than five decades in non-US markets. But it doesn’t happen all the time.

The snowiest month in Vail is February. If you were to visit Vail during February and there was no snowfall, would you start to question if February is the best month to visit Vail if you’re looking for fresh snow? Or would you chalk it up as an outlier event? There will be times when you visit Vail in February and don’t get any snow. Similarly, history has shown that small caps outperform large caps, value stocks outperform growth stocks, and high profitable stocks outperform low profitable stocks. Does this happen over every time period? No. But the longer you stay invested, the greater the chance of capturing the premiums and having a successful investment experience.


The Power of Markets

Many people believe that in order to have a successful investing experience you need to predict what’s going to happen. Where are interest rates going? What’s going to happen with inflation? What’s the next hot stock? That’s not true. The market does a fantastic job of processing information to a point where prices settle at a fair price.

At a client event hosted by a financial advisor, a jar of jellybeans was placed in the lobby and attendees were asked to estimate the number of jellybeans it contained. The participants wrote down their estimates, and whoever offered the closest estimate to the actual count received a prize. There was a wide range of estimates—409 to 5,365 jellybeans. The average of all estimates was 1,653. The actual count was 1,670. This experiment has been repeated at other client events, and the average of all guesses is usually very close to the actual count. The principle is that the combined intelligence of a group is better than the knowledge of one person. Together, we know more than we do alone. The market is like a giant jar of jellybeans.


Have a great rest of the Summer!



John, Bill, Mark & Melanie