D36K

The title may lead you to think of a set of coordinates in the classic game of Battleship, but it is actually about something featured front and center in a book published in 1999 during the roaring days of the internet stock frenzy. While the investing masses were busy accumulating stocks in prestigious companies like Pets.com and staking out Toy’s R Us stores for the latest shipment of beanie babies, many bought this book believing that its predictions were not only inevitable but just around the corner. This past week the forecast made 22 years ago finally came to pass. The book, of course, was the seminal classic Dow 36,000 (D36K) and has been used for years as a punching bag due to the disastrous timing of its original publication.

RK Senior Advisor and partner, Jeff Hall, remembers reading this book when he first started in our industry. He said that this book and a few others were required reading for any of the newcomers back then. While I could spend the following few paragraphs dissecting the book, I think the broader point is bringing attention to these types of bombastic headlines and books. The authors that write these seem to have sincere and tightly held beliefs about what they think will happen in the coming quarters, years, and even decades. After reading different versions of these books myself in the aftermath of 2008-09, I now fall firmly in the camp that nobody knows how the future will play out. The authors were indeed proven right, but even broken clocks are right twice a day.

After the book’s publication in 1999, the S&P 500 spent the next decade recovering from the dot com bust and then the housing bubble burst. At the end of the decade, US stocks were down 9.9%. Having hindsight on our side, it seems evident that stocks in the US had nowhere to go but up after such an abysmal decade. Indeed that is what we observed in the following decade, as noted by the chart below. Some pundits called the period from 2000-2009 the “lost decade,” while many dubbed the proceeding period between 2010-2019 the “found decade.” Notably, some of the best performers from the “lost decade” were the worst in the “found decade.” And while the current decade is off to a bang for stocks, it is impossible to know which segment will be the best.

So if you accept that predicting which segment will do the best is impossible, how should investors build a globally diversified portfolio?

This question drives to the our core beliefs about predicting the future and being humble in not knowing. Our firm prefers to own equities not according to what we imagine or books that may influence our opinion but owning them in proportion to their overall weighting in the global market. For example, US Stocks comprise roughly 55% of the worldwide equity pie. Similarly, the other segments are targeted in the same fashion. This framework gives us both the opportunity to diversify and a way to mitigate risk simultaneously. When Emerging screamed higher in the 2000s, client allocations weren’t betting it all on that segment, and likewise, they weren’t taking on too much risk by massively overweighting US stocks while they were down for the entire decade.

This intentional approach is a crucial component of having a truly diversified global weighting for stocks. Of course, the pundits and book writers will keep making wild predictions. Still, we can take comfort knowing that the market will sort out the winners and the losers in the long run, and we will participate in their growth by diversifying globally and rebalancing according to the Investment Policy Statement. We predict that markets will continue to work, and it is our opportunity to help clients capture their returns according to their long-term financial plans.

Nathan Smith is a Portfolio Manager with Rather & Kittrell.