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05 April, 2016 Education

March Money Madness: Investment Scoring Streaks

Basketball’s Syracuse versus Virginia

The excitement of college basketball’s March Madness has come to an end for 2016. I tend to only watch the bigger games and won’t even stick around for those unless it’s competitive. As I was watching a few exciting games this season, I realized one (of probably many) similarity in basketball games and investing – scoring steaks!

Basketball Scoring Streak

10th seed Syracuse goes on a scoring run of 25 to 4 in just 6 minutes to default 1st seed Virginia!

One game in particular that I watched this season was an Elite Eight game featuring 10th seeded Syracuse taking on 1st seeded Virginia. There were 9 ½ minutes left, underdog Syracuse was down 15 points…this is when I tend tune out but fortunately, this time, I didn’t change the channel. Stunning basketball fans everywhere, just six minutes later Syracuse was UP by 6 points! That’s exciting basketball even for casual fans like me!

I got thinking about these scoring streaks, how a team can be written off for as good as gone, and against all odds they rally back. I find it interesting how what can appear as nearly a sure outcome can sometimes play out very different. This last point is one that plays out much more frequently for investors!

Stock Market Scoring Runs

I may be a casual basketball fan but I’m an avid student of the markets. What I realized in thinking about this Syracuse scoring streak is that similar streaks happen in the markets all the time! Although it typically does not happen over a period of minutes as it does in basketball, it can unfold in a relatively short period of time.

This year we’ve already had a couple obvious, relatively short-term, market scoring runs. In mid-January, the U.S. stock market was down 9% in just 12 trading days (certain U.S. stock indexes were down more). That’s a bad run and some skittish investors quickly through in the towel. Then, just as it felt like hope was lost, the market turns around, goes on a positive scoring run gaining 11.5%, and is now positive for the year.

The fact is that ten percent moves are meaningful and the moves we’ve seen so far this year have been quick, but really not all that unusual. Interesting about these 2016 runs in U.S. stocks is that they have been accompanied simultaneously by many other markets going up and down at similar times and similar magnitudes. The speed of these scoring runs, accompanied by many other markets following suit, is not how it tends to play out over longer periods of time.

Emerging Market Stocks versus U.S. Stocks

Scoring streaks in the markets can persist for a long period of time, years instead of just days or weeks, with winners seeming to relentlessly beat the losers. Inevitably though these long streaks come to an end and often fortunes get reversed. Take for example U.S. stocks as compared to emerging market stocks:

Emerging Markets Countries

China, Korea, Taiwan, India, South Africa, Brazil, Mexico, Russia, Malaysia, Indonesia, others

For what seems like forever now, U.S. stocks have been trouncing on emerging market stocks. For the 6 years of 2010-2015, U.S. stocks have gained 108% and emerging market stocks have lost -11%. It may be a resounding win for U.S. stocks but this outcome has certainly not always been the case.

Consider the 10 years of 2000-2009, what some investors call the “Lost Decade”, U.S. stocks were down -9%. It certainly was a lost decade for investors only in U.S. stocks. During this same time though, it seems to have been forgotten by many investors that emerging market stocks gained +132%!

These are incredibly powerful market cycles – one market doubles in value while the other languishes for years. These cycles, with distinct winners and losers surfacing in the process, can have a tremendous impact on the performance of your portfolio. As obvious as they look in hindsight, you cannot predict when they will occur. You simply cannot afford to miss any of these scoring streaks…the multi-year ones or the short ones like we’ve had the last couple of months.

My Advice

“The stock market is a mechanism for transferring money from the impatient to the patient.”

– Warren Buffett

The markets are a game of patience. You must stay focused on the long-term and ignore the short-term. As demonstrated, scoring streaks in the markets can sometimes go on for years. Just when investors are certain of a particular outcome, the markets stun investors with an amazing comeback or reversal. Don’t let this surprise you, it happens all the time.

My best advice for you…stay diversified1 and stay the course. Patient investors, with a sound and strategic investment strategy, have always been rewarded. I believe that will continue to be the case.

1Diversification Reminder: diversification requires multiple investments that do NOT move up and down together.

Disclosure

The performance of U.S. stocks during 2016 are represented by the index fund ETF symbol SPY.

U.S. stock performance for the period 2000 – 2015 is represented by the S&P 500 index. For the same period, emerging market stocks performance is represented by the MSCIEAFE Emerging Market Index and the index fund ETF symbol EEM.

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