To Washington Park Advisors Clients:
Enclosed please find your summary of Investment Results for the year ending 2024.
For most of 2024, stock market commentary was centered on the so called “Mag Seven” companies, which drove well over 50 percent of the S&P 500 return. The other 493 companies contributed 11.7 percent for the year and given a representative 60:40 equity:fixed income portfolio, (assuming an approximately 4 ½ percent return on the fixed income allocation) one would have expected an approximate 7 ½ percent to 8 ½ percent total return for the year. Instead, of course, the total returns were much higher because of the seven stocks that received nearly all of investor’s attention in 2024.In fact, the narrowness of the returns inside the S&P 500 were by far the most concentrated in our recollection. However, late in 2024, and certainly into 2025, the market returns have broadened out, and as such we expect a much less concentrated total return profile in this year’s S&P 500. Certainly, some of the enthusiasm that investors showed for stocks like Nvidia, and Tesla was rational; however, having seen moments like this in the past (the dot.com bubble in 2000 & the “Nifty Fifty” in the 1970’s and 1980’s), the question we believe investors must ask is when does rational exuberance turn into irrational exuberance. No one can predict the day that it will switch but we know from past periods, many investors are surprised, and some incur substantial losses when the time comes. As we write this letter in late January some reckoning for the enthusiasm felt for the “Mag Seven” has been happening.
Historically, our investment approach has led Washington Park to companies that have revenue, earnings, and are trading at a discount to their intrinsic value as opposed to companies with a large disconnect between their current trading price and their current value. In short, every stock has a price and a value. The price is simply the trading price that is constantly changing and what you pay when you buy or what you get when you sell. The value of a stock is the present value of future cash flows and the current cash yield (for companies that pay dividends). Part of our investment research focuses on identifying companies which have a current stock price that is below our calculated value using our preferred metrics. While the “Mag Seven” have performed well, we believe their prices have gone considerably higher than their value. In theory price and value should be the same, but because of behavioral economics this is not always the case. Euphoria and enthusiasm take some stocks well above their value, while neglect, worry, and/or boredom takes some stocks well below their value. Our experience and assumptions are that price and value tend to converge over time. Identifying stocks where we believe the price is below our calculated value is a better long-term strategy than following the momentum strategy of buying stocks that are extremely expensive and hoping the price/value disconnect keeps expanding. For over 30+ years our strategy has enabled clients to meet their financial goals and needs without the ups and downs and vagaries of the equity markets.
As we have moved through the month of January, we continue to see a broadening out of equity returns, including financials, airlines, pharmaceuticals, and energy. It will not be surprising if equity markets experience slightly above normal volatility as the new administration implements its economic agenda. Our asset allocation is such that we are positioned to take advantage of any opportunities that occur as the new year continues.
In addition to our quarterly commentary, we want to again mention that our client portal provides an online view of your portfolio and allows you to receive all communications, including your quarterly statements, electronically instead of by mail. If you are interested in this option, please send an email to clientportal@waparkadvisors.com.
If you have questions, please do not hesitate to call.
Warm regards,
Washington Park Advisors
