INSIGHT | ANDREW'S SEVEN LESSONS FROM INVESTING IN 2024

For many, 2024 was a tumultuous year, to say the least.?

To kick off the year we thought we would share Andrew’s Seven Lessons From Investing in 2024 bringing insights that shaped portfolios this past year and will help guide smarter investment decisions in 2025.

LESSON ONE |? We can’t avoid the losers, but we can mitigate the impact on our portfolios by not putting all our eggs in one basket - i.e. diversifying and limiting exposure to each company, sector, or country.

EXPECT TO BE WRONG ON SOME IDEAS ?How diversification saved portfolios in a year of mixed predictions ?

In January 2024, as I do every year, I listed?the major themes Wall Street strategists saw playing out in the coming year.?There were some that strategists from various firms mostly agreed on, and some where they didn't.?Most were optimistic about high-quality technology companies, Japan, India, Mexico, and US healthcare stocks. So how did those calls work out?

• High-quality tech shot the lights out.
• India and Japan performed very well during the first half of the year but lost some momentum in the second half.
• US healthcare is up about 2% YTD, but it’s been the worst-performing sector by quite a margin.
• Mexico has been trending lower all year. The IPC index is down about 10%, and the MSCI Mexico index is down 24% YTD.

On balance, those forecasts were quite good. Three winners, one that underperformed and ended flat, and one proper loser. Incidentally, there was less agreement about the direction of inflation, interest rates, and emerging markets. As it turned out, the inflation and rates outlook were murky for most of the year. Emerging markets have also been complicated due to interest rates and China’s spluttering economy. Every investor, even those highly qualified ones employed by the likes of Goldman Sachs/Citi Bank and JPMorgan, will have ideas that don’t work out. It’s just the nature of dealing with uncertain outcomes in a world of unlimited possibilities.

LESSON TWO |? No indicator, model, or rule of thumb is fool proof. We can use them as a guide, but not as something that will never fail.

MODELS WORK UNTIL THEY DON’T ?When tried-and-true indicators lose their edge ?

One of the reasons many investors expected a recession through 2023 and earlier in 2024, was the?Inverted Bond Yield Curve The yield curve is said to be inverted when short-term rates (2 years) are higher than long-term rates (10 to 30 years). This has been one of the most reliable leading indicators for a recession over the last 50 years.

In September, the US yield curve reverted after being inverted for a record 783 days. At this point, a recession isn’t impossible, but it certainly seems less likely than it has over the last two years.

Recessions typically occur within 18 months of the initial inversion, so it would turn out to be an extremely early warning anyway. Historically, the bond market was regarded as the ‘smart money’, and the most accurate predictor of future inflation, growth, and rates.

Much has been written on the reasons it may be losing its edge.?It has been pointed out that bond markets have changed, and central banks are a bigger part of the market than they used to be.

In August, another recession indicator,?the Sahm Rule, flashed a warning signal.

At the time, Claudia Sahm the inventor of the indicator was quick to point out that?its “historical accuracy doesn't mean it will never be wrong”.?She developed the indicator during the Global Financial Crisis post 2008/9 and adopted it because it had been accurate up to that point. It’s not just economic models that have had a bad year.

Allan Lichtman’s “13 keys to the White House” model failed to predict Donald Trump’s win in November.

His model - which isn’t based on polling, but on 13 True/False questions - correctly predicted the winner in the previous nine elections. But it failed on the 10th try.

LESSON THREE |? The same applies to perceived risks. There are always risks to investing, but unless perceived risks turn into reality, stock prices keep rising. This proved to be the case during the second half, even before the US election.

A GOLDILOCKS ECONOMY IS GOOD FOR EQUITY PRICES Finding a balance in a mid-cycle economic phase ?

Most of the world economy is now ‘mid-cycle’ and has been for most of the year. Mid-cycle typically implies that the economy is growing at a moderate rate, inflation is relatively stable, and interest rates are normalising.

During the second quarter, a few analysts pointed out that we had the ingredients for a?‘Goldilocks economy’. That means growth is neither too hot nor too cold. This can be good for business confidence, as decision-makers are neither concerned about a recession, nor inflation.

A Goldilocks economy can also be very good for markets. Expectations usually aren’t too high, which means things tend to turn out better than expected.

Worries about stocks being overvalued can actually prove to be bullish, too. That may seem counterintuitive, but when investors think the market is overvalued, they often stay on the sidelines, and then capitulate when prices are even higher.? See later lesson 7!

LESSON FOUR |? Sometimes market volatility leads to more volatility - but often it turns out to be a buying opportunity for patient long-term investors. To take advantage of volatility, you need to know which stocks you’d like to own, AND the price you are prepared to pay for them.

VOLATILITY IS USUALLY THE TIME TO TAKE ACTION Turning market turbulence into opportunities ?

Just a few weeks into the third quarter, global?markets were hit by a perfect storm, causing volatility to spike.?The primary catalysts were the return of recession fears and the Bank Of Japan raising rates, which caused the carry trade to unwind in a matter of days causing massive short-term global market turmoil.

It turned out that those catalysts were temporary, and markets quickly recovered. That turned out to be one of the best buying opportunities of the year. The S&P 500 is up 18% since that correction, while the Nikkei 225 index is up 29% from the low.

Another theme coming into the year was geopolitical risk.?

We covered the major geo-political risks in a webinar last year.?We included the wars in Ukraine and Gaza, China’s economy, protectionism, and the threat of cyberattacks. Those risks are all still present as we head into 2025.?

Geo-political events usually turn out to be buying opportunities too. Some, like Trump’s tariffs, turn out to be impactful for certain economies and companies.

But for the most part, these events come and go without affecting markets.

LESSON FIVE |?Typically, quality companies in growth industries are always fully valued. The fact that chip makers are cyclical means you occasionally get the chance to invest at really attractive valuations.

THE SEMICONDUCTOR INDUSTRY IS STILL CYCLICAL Understanding the ebb and flow of a critical industry ?

The semiconductor industry has generally been considered to be cyclical, unlike other technology and growth industries.?New innovation drives demand which leads to higher prices, increased capacity and ultimately to too much inventory, too much capacity, and a collapse in prices.

More recently, analysts have begun to think it’s getting less cyclical, as it becomes more complex and the number of end-use industries increases.

In the last few years, the focus has been on Nvidia, which has enjoyed ongoing demand for AI infrastructure. But most of the chip industry is exposed to other industries, where demand continues to be cyclical.

The reason we mention this is that the semiconductor industry is exposed to nearly every important secular trend, from AI to automation, clean energy, EVs, and healthcare.

If there’s one industry worth getting to know, it’s the semiconductor industry.

LESSON SIX |?All speculative assets typically have two things in common. The first is that the valuation can’t be explained. The second is that the price typically collapses within a year.? If something is an investment, you should be able to explain the valuation case and the catalysts that back the valuation up.

MANY INVESTORS ARE STILL RELYING ON HYPE AND SENTIMENT TO MAKE DECISIONS ?

In 2021 the ‘meme stock’ phenomenon emerged, and stocks with poor fundamentals traded up to ridiculous valuations.?The stocks that started it all,?GameStop?and?AMC, have since fallen by 98% and 96% respectively.

A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually due to activity online, particularly on social media platforms. (Investopedia)

One would have thought it would have ended there. Nope, since 2021, we’ve seen a boom and bust in NFTs (now apparently all worthless) and SPACs -most down 95%, and those that are successful are well off their highs.

There has been huge coverage of the?institutional adoption of Bitcoin?and the regulatory nod of approval. but the camps remain divided between those who view digital assets as a speculative asset, and some who view them as a long-term store of value.

Somehow Dogecoin is now the 7th most valuable cryptocurrency, with a market value of $59 billion! Some analysts are still trying to work out the bull case for that one… and it is quite different from Bitcoin.

PREMIUMS CAN PERSIST FOR A LONG TIME Why certain markets and companies justify higher valuations ?

In September the case was made for?the US market’s exceptional value/price premium.?With the right environment, a virtuous cycle begins and attracts capital, entrepreneurs, and skilled workers.

Equities in markets like the US, trade at a premium because investors would rather pay more to have their capital in an environment likely to generate more innovation and growth.

Unless something changes, the premium is likely to persist or grow. The chart below shows?how the US premium (in green) continues to expand compared to other markets.

The performance of the Magnificent 7 stocks in 2024 has illustrated the point.? At the beginning of the year, they traded at a premium to the rest of the US market, and to other markets.

But they went on to justify the premium and continued to outperform...and the prognosis is that 2025 will see continued momentum from them.

THE FINAL LESSON When you're working out what you think a company is worth, it’s worth accounting for the premium, and whether its’ likely to remain, expand or contract.

So, as we head into 2025, all I can say is happy investing with some of the lessons learned from 2024!

Andrew 3rd January 2025