Managing your portfolio in today's bull market is a difficult task. Many stocks trade on rich valuations after the S&P 500's 50% gain since March 2020. However, the economic and political outlook is uncertain.
In my opinion, the past performance of the stock market can act as a useful guide to its future prospects. It can help investors to manage their portfolios more efficiently, and avoid unnecessary risks.
Oaktree Capital co-founder Howard Marks (Trades, Portfolio) takes the stock market's track record into account when allocating capital. His value investing strategy and patient approach may be key reasons for his long-term outperformance of the S&P 500.
Past performance acts as a useful guide
The prospects facing the stock market and economy are always unique. However, similar scenarios are likely to have occurred in the past. Therefore, investors can gain a useful insight into how to respond to specific current scenarios by using historical events as a guide.
For example, high company valuations that are based on optimistic earnings growth rates have previously led to disappointing returns for investors. This does not necessarily mean that today's richly-valued companies will suddenly experience rapid stock price declines after their recent gains. However, in my opinion, it does mean that adopting a prudent investment strategy at the moment could lead to a more efficient capital allocation.
The stock market's history also shows that it operates in a cycle. This may be a useful reminder that today's rich valuations are unlikely to expand indefinitely, and that the current bull market will ultimately come to an end. As Marks once said, "History doesn't repeat itself, but it does rhyme."
A value investing strategy
The past performance of value investing strategies shows that they can produce high returns over the long run. However, they can underperform other investment styles over the short run. For example, a growth strategy may have beaten a value investing strategy this year as valuations have moved to levels that are difficult to justify using company fundamentals.
In my opinion, reminding yourself that value investing strategies have worked over many decades may provide additional justification to continue to using them. Their historic returns may persuade you to always obtain a discount to a company's intrinsic value before buying it. Over the long run, this may lead to a higher chance of outperforming the stock market compared to a growth strategy that fails to avoid overpriced securities.
Marks has always been a value investor. As he once said, "An accurate estimate of intrinsic value is the essential foundation for steady, unemotional and potentially profitable investing."
A contrarian standpoint
The past performance of the stock market shows that having a contrarian standpoint can be beneficial to your portfolio's performance. It may allow you to more easily capitalize on low valuations among unpopular stocks in bear markets when investor sentiment is weak. It may also mean that you avoid purchasing overvalued stocks that are popular among increasingly optimistic investors during bull markets.
A contrarian strategy requires a large amount of self-discipline that can be difficult to maintain. However, in my opinion, going against the market consensus is a logical approach because it allows you to more easily use the stock market's cycle to your advantage.
Marks has always sought to disregard the views of others when managing his portfolio. As he once said, "Not only should the lonely and uncomfortable position be tolerated, it should be celebrated."
Read more here:
- Charlie Munger: A Simple Strategy Can Outperform the Stock Market
- Benjamin Graham: Stick With Value Investing for the Long Term
- Warren Buffett on Taking Advantage of Undervalued Stocks
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