POP QUIZ

The Vanguard Total World Stock ETF (ticker: VT) tracks one of the broadest ranges of stocks worldwide for any investment fund — how many stocks does it invest in? (The answer is at the end of today’s newsletter!)

IN THE NEWS

💸 Everyday Investors Are Beating The Market?

Who said amateur investors can’t beat the market over the long haul? Get this: The average stock portfolio of individual investors has beaten the S&P 500 since 2014.

Often, we see in the financial press that everyday investors are unsophisticated. However, amateur investors who bought and held quality companies with a long-term mindset benefited over the past decade.

Sitting pretty: The average individual-investor stock portfolio is up about 150% since early 2014. That beats the S&P 500’s 140% gain during the same period.

• The calculation is based on individual investors’ brokerage account activity in U.S.-listed stocks and excludes purchases of exchange-traded funds (ETFs) and mutual funds. It also excludes trades made via retirement accounts.
• Stock investing is one of the only activities where amateurs can regularly beat the pros, as professional money managers routinely underperform the S&P.
• Over the past decade, 86% of all large-cap U.S. equity funds have underperformed the S&P 500 – yikes! (Queue the Charlie Munger/Warren Buffett disdain toward money managers here and here.)

How’d they do it? By holding the big tech companies that many amateur investors have come to know and love. Apple, Tesla, and Nvidia comprise about 40% of the average individual’s stock portfolio. Megacap tech has surged since 2014:

• Apple: 800%
• Tesla: 2,000%
• Nvidia: 10,000%

To be sure, there’s no guarantee that amateurs will beat the market in the next decade. (What happens if/when big tech isn’t driving markets?)

Also, many amateurs have lost fortunes through less-than-shrewd stock-picking. Many others have “held the bag” on stocks whose valuations soared during the pandemic, only to plummet 50% or more since.

Why it matters:

Turns out, the “little guy” can do quite well after all. It’s one of the beauties of the stock market: Everyday people can own a piece of any public company and reap a reward if it performs well.

• Trading activity surged during the pandemic but has fallen about 50% since the peak in early 2021. Still, individual investors are trading at levels well above pre-pandemic levels.
• About 58% of American families have stocks in some way, often through company-sponsored retirement plans. About 21% of U.S. households directly own individual stocks.

A trend likely to continue: Buy what you know, as Peter Lynch would say. Everyday investors do this naturally.

• “That’s really no different than generations before and no different than some of the famous investors out there,” Robinhood’s head of investment strategy says.
• Robinhood tracked the 100 most popular stocks among its 23 million users. They include Apple, Microsoft, Tesla, Nvidia, Amazon, Ford Motor, Walt Disney, and everyone’s favorite meme stocks: GameStop and AMC.

In other words, the companies that people are most familiar with.

Read more (from Wall Street Journal)

🫤 Meta Adds to Big Tech Earnings Reports

More on Big Tech: Meta (Facebook’s parent) joined the other big tech names, Alphabet and Microsoft, in reporting earnings, and…investors didn’t love the results.

Its stock dropped over 6% on Thursday, just one day after Alphabet’s fell nearly 10%, wiping out over $100 billion in market capitalization.

The pessimistic response comes as a surprise since Meta’s revenue grew at 23% — the fastest pace since 2021. It also reported a 164% increase in profits from last year, handily beating Wall Street’s top-and-bottom line projections.

• With 2.09 billion daily active users on Facebook, that key metric also surpassed expectations.

So, what gives? It’s hard to point to anything specific from the earnings that would drive a big selloff.

Sometimes, it’s the simplest answer: Meta’s stock has had a phenomenal year (up some 126%), and short of absolutely breathtaking quarterly results, sustaining that momentum would be tough.

• But long-term investors in Meta should still feel pretty good about the report.

If we were to nitpick Meta’s results:

• Meta’s Reality Labs division, focusing on augmented and virtual reality products, racked up another $3.74 billion in operating losses last quarter (which is nothing new! The division has lost almost $25 billion since the beginning of last year.)
• An initial rally after earnings dropped quickly reversed on rather vague concerns about its advertising business from Meta’s CFO, who said, “We’re very subject to volatility in the macro landscape…The revenue outlook (for next year) is uncertain.”

Of course, being sued this week by dozens of states doesn’t help, either. Some may be worried that Meta’s blowout quarter, amid controversy about its platforms’ links to depression and anxiety amongst children, will spur more and harsher legal action.

Why it matters:

Big tech companies have carried markets. And yes, we use the word “markets” broadly — not just the U.S. The MSCI World Index, a benchmark for global stocks, is up for the year, but when you take out the seven biggest American tech companies, it’s down for the year.

In other words, Meta, Alphabet, Apple, Microsoft, Amazon, Tesla, and Nvidia (aka the ‘Big Seven’) are the reason global stock market averages are in positive territory in 2023.

• While the MSCI index, including the thousands of companies it follows worldwide, has added a combined $3.4 trillion in market value in 2023, the Big Seven have created roughly $4 trillion in market value.
• Without the Big Seven, the global stock benchmark would’ve lost $600 billion in value this year.

Investors’ sour response to Meta and Alphabet, two staple members of the Big Seven, is a major headwind to the Nadaq, S&P 500, and market indexes globally.

Read more

💪 The U.S. Economy Is Still Humming Along

We are once again here to report that the U.S. economy just. won’t. stop. growing!

Despite endless recession speculation, America kept chugging ahead in the third quarter (July 1 — September 30), growing at a 4.9% annualized rate, according to the most recent gross domestic product calculations.

• Growth was twice as fast as in the second quarter of this year, supported by a 4% increase in personal spending — the U.S. economy’s primary growth engine.

Maybe, just maybe, things really are going to be okay? Of course, if you call for a recession long enough, one will eventually happen. But recession bears have kept twisting narratives to justify their predictions, and they simply haven’t come to fruition yet.

• As Bloomberg puts it, “The primary driver of that resilience is the enduring strength of the job market, which continues to fuel household demand.”
• In other words, the wave of corporate layoffs we saw in tech earlier this year hasn’t spread to the broader economy. So long as most people still have their jobs, they can keep spending. And spending is what matters to America’s consumer-driven economy.

Why it matters:

As so many stories do these days, this one connects back to the Federal Reserve and its inflation-fighting policies.

Stepping back: Last year’s consensus view was that the Fed would raise rates, cause a (hopefully mild) recession, and that economic slowdown would be the fastest way to tame inflation by reducing demand for goods and services.

• But inflation has come closer into line while the economy remains healthy, which was considered an unlikely but remotely possible “soft-landing” scenario.

To clarify, the Fed is by no means hoping for a recession if it can engineer lower inflation without one.

• In fact, it never wanted a recession, but there’s not much historical precedent for raising rates to tackle inflation without causing one, so many felt an economic slump this year was implied after the Fed began hiking in 2022.

Looking forward: Economists expect things to cool down in 2023’s final months, but the outlook is still positive. Some continue to ring warning bells about 2024, though.

• Ultimately, with the economy booming but inflation above its 2% target, the Fed cannot declare a soft landing yet, and a robust economy makes the case for even more rate hikes stronger.

Read more

TRIVIA ANSWER

Vanguard’s Total World Stock ETF holds some 9,700 unique stock positions, which is actually shy of its benchmark index that tracks over 10,100 companies.