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Apple, Microsoft, Alphabet (Google), Amazon, Tesla and Meta (Facebook) have dominated investing discussions and been the primary drivers behind the Nasdaq and S&P 500 returns in recent years.  Their outperformance vs. other companies have led some to experience FOMO and concentrate their portfolios.  But concentration in any investment carries risk.

Growth stock market values are primarily driven by a company’s expected future growth and innovation, with some not posting profits or holding significant physical assets, which can sometimes lead to stock prices that appear to be built on extreme optimism.  Tesla is a good example, with a market capitalization (number of shares outstanding times its current trading price) at the end of January that was over two times greater than GM, Toyota, Rivian Automotive and Lucid Group – combined.

As we’ve discussed in our meetings with clients, growth stocks have done very well over the past 10+ years in the low interest rate environment we’ve experienced, giving them ample access to capital for growth and expansion.  But as 2022 has shown us so far, the one constant we can all count on is change, and change can sometimes bring unsettling drops in market prices.

Last Thursday, the Bank of England met and raised interest rates, with 4 of the 9 members of the Monetary Policy Committee dissenting for a .50% hike vs. the .25% that was passed.  The European Central Bank (ECB) met the same day and held rates steady, but like Powell of the US Federal Reserve in the prior week, the ECB bank president Christine Lagarde indicated an increase in 2022 was likely.  So it’s probably reasonable to expect an increase in global interest rates.

The day before the rate announcements Meta, the parent company of Facebook, disclosed that privacy changes made by Apple were making it harder for apps to track iPhone users’ digital habits, and would cause Facebook to lose about $10 billion in ad revenue this year.  The company’s chief executive, Mark Zuckerberg, said that it was having trouble competing with TikTok, and that globally Facebook lost users for the first time.

Investors processed this information along with the outlook in interest rates, and Meta shares dropped over 26% on Thursday, the worst one-day drop in the value of any US Company ever according to Birinyi Associates, wiping out over $230 billion of Meta’s market capitalization and passing the $180 billion losses experienced by Apple and Microsoft in 2020.  If your expectation of a company’s price appreciation is tied to its projected future earnings, moves in rates and changes in the competitive landscape have a big impact.

Other growth stocks have experienced significant year-to-date volatility as well, causing growth hedge funds to experience losses of 15% or more in January.  Tesla was down 22% through Friday, while after a nearly 14% rally for the day, Amazon recovered to a year-to-date loss of 7.5% for the year.

All of this is to say that just when we begin to believe a company, a sector of the market, or a country will continue to dominate investment returns, we will usually be proven wrong.

When we look at longer periods of time, we can see the US market has had periods of significant dominance, particularly over the past 14 years, but so have the combined countries that make up the EAFE index in Europe, Australasia and the Far East.

It’s easy to find companies that inspire us with their innovations and growth prospects, and it’s fun to own them and be part of the excitement.  The difficulty is knowing which ones will be overtaken by competition or when their value will be deflated by other factors beyond their control.

Holding a portfolio that is diversified by country, company size and type provides us with an opportunity to take advantage of gyrations in the market and protects us from outsize losses due to concentrated holdings.  Adhering to an investment discipline that guides us on when to buy and sell helps us take profits when an asset class becomes too large a portion of our holdings and buy into investments when they’re down and out of favor – because time and experience have shown us that nothing lasts forever.