Q2 2024
In nursery school, one of the first lessons we learn is to "Stop, Look, and Listen" when our teacher is speaking. This simple yet profound mantra forms the cornerstone of early childhood education. I vividly recall these moments from my own childhood and have watched my kids learn the same.
However, as we navigate the complexities of adulthood, this sage advice often gets drowned out by the constant noise of our fast-paced lives.
In the frenetic world of finance, the wisdom of stopping, looking, and listening is more critical than ever. We have two eyes and two ears but only one mouth for a reason: to observe and listen twice as much as we speak. This quarterly commentary explores how the principle of "Stop, Look, and Listen" can refine our investment strategies and lead to smarter financial decisions.
Observing the Market: A Balanced Perspective
Let’s begin by stopping, looking, and listening to the current market landscape. Recently, big technology companies have been the shining stars of stock market returns. But has the hype gone too far? What does this mean for investors like us?
The S&P 500, a commonly used measure of US stock market performance, is weighted by market capitalization. This means that the largest companies have the greatest influence on the index's performance. In contrast, an equal-weighted S&P 500 assigns the same weight to each of the 500 companies, regardless of their size. This difference reveals how a few dominant giants can disproportionately impact the market-cap-weighted index, while the equal-weighted index offers a more balanced view of the overall market performance.
2024 YTD Performance of S&P 500 vs. equal weighted S&P 500 (Jan 1, 2024 - June 30, 2024)
The Impact of Market Concentration
This year, the comparison between the equal-weighted and market-cap-weighted S&P 500 indices highlights the dominance of the "Magnificent 7" tech stocks—Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. These companies have been the primary drivers of performance, illustrating a significant disparity between these tech giants and the broader market.
It's a stark reminder of the importance of diversification and the risks of overconcentration. Despite the index consisting of 500 companies, about 68% of this year’s returns have been skewed by just these 7 companies, which now make up approximately 32% of the index.
This is an opportune moment to remind ourselves to Stop, Look, and Listen. This principle is a two-way street. Just two short years ago in 2022, these tech giants experienced significant slumps, causing disparities in performance in the opposite direction and inflicting considerable pain on many portfolios. This all underscores the value of observing and listening to long-term trends rather than reacting to short-term noise.
2022 Performance of S&P 500 vs. equal weighted S&P 500 (Jan 1, 2022 - December 31, 2022)
Accepting New Perspectives: The Power of Open-Mindedness
The principle of "Stop, Look, and Listen" extends beyond market analysis; it shapes how we interact with others and embrace new perspectives. In today’s polarized political environment, the reluctance to listen to differing viewpoints can hinder our ability to find common ground and innovative solutions. By adopting an open-minded approach, we can better understand diverse perspectives, generate new ideas, and foster greater unity.
AI: Learning from the Younger Generation
This summer, I had the pleasure of working with an intern, who is over 20 years younger than me. While his goal was to learn about the financial services industry from me, I made sure to listen and learn from him as well.
Like many, I’m fascinated by the latest advancements in AI. I use it occasionally for basic tasks but haven’t seen it as a revolutionary force. Having lived through the creation of the internet and the iPhone—moments that undeniably transformed the world—I’ve learned to be cautious with new technologies. Most offer incremental improvements rather than groundbreaking changes. My initial interactions with AI didn’t evoke the same sense of revolution.
However, when debates about AI began with my intern, I took a step back to stop, look, and listen to his insights. His passion for AI reminded me of my own excitement during the early days of the internet and iPhone.
Initially skeptical, I realized my views were shaped by past experiences and the hype surrounding companies like NVIDIA. My intern patiently explained the practical applications of generative AI in his studies and daily life. He also highlighted other AI types used to streamline company functions and increase efficiency. Our discussions about Apple’s new AI and its potential impact on sales were particularly enlightening.
My intern’s perspective challenged my skepticism. He emphasized the transformative power of AI software, arguing that algorithms and applications are where the true value lies. While I now recognize AI's potential to be a game-changer, we differ on the timeline for these advancements. His youthful optimism suggests rapid and widespread AI integration, whereas my experiences make me more cautious. I’ve seen many technologies evolve slowly over time (something I discussed in Ep 2 of The Big Bo $how), and I believe AI's full impact may take longer to materialize than both he and the market currently anticipates.
Nonetheless, our discussions have been invaluable. I've gained a newfound appreciation for AI's potential to reshape our world in the future. This experience underscores the importance of stopping, looking, and listening—embracing new perspectives can lead to profound insights and growth.
The Power of Reflection: A Key to Smarter Investing
Stopping, looking, and listening not only open doors to new perspectives but also provide the crucial time needed to reflect and decide whether you agree with others. In a world dominated by Wall Street's constant chatter urging you to "buy this" or "sell that," the true path to wealth lies in thoughtful reflection, not impulsive actions.
Remember the formula: Time + (Discipline)² = Financial Freedom. If someone is pushing for immediate action, their incentives might not align with yours. By taking a step back and reflecting on your thoughts, you can better align your actions with your long-term goals. Adopting a "Stop, Look, and Listen" mindset helps you evaluate your options and avoid the "Act Now!" traps.
Everywhere you turn, people are buzzing about the “next big thing” and urging you to “get in now!” However, the real secret to successful investing isn’t in chasing trends. It lies in recognizing the present constants that will endure. What fundamental human needs or desires persist over time? Which businesses or industries are built to last?
By focusing on these timeless elements, you can tune out the noise and make intelligent, balanced decisions. Reflecting on what remains constant, rather than fixating on predicting future trends, allows you to invest wisely and steadily build your wealth.
Takeaways: The Genius of Simplicity
Albert Einstein famously said:
“The definition of genius is taking the complex and making it simple.”
Over the years, I've learned that creating wealth embodies this principle. It's simple in theory but challenging in practice. If there's one takeaway from this letter, it's that the first step to simplifying your path to wealth is to “Stop, Look, and Listen” to the world around you.
Thank you for letting us be a part of your financial journey. We're dedicated to continuing this partnership with integrity, knowledge, and passion. Remember, building wealth is by choice not chance.
Here’s to achieving even greater success together.
Until next quarter,
Jason Blumstein, CFA®
CEO & Founder
Julius Wealth Advisors, LLC
Disclosures:This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.