By Tim Courtney, CIMA, Chief Investment Officer
We often say that one of our primary goals is to be an accommodating investor. To be that kind of investor is to be exactly what it sounds like — just as an accommodating person is agreeable and tries to meet the needs of those around them, an accommodating investor aims to be agreeable and provide the market with what it wants.
Think about what investors do when they really want to acquire an asset. Those investors, which we’ll call the market, will be willing to pay a high price for the asset. An accommodating investor is willing to meet the market’s needs and sell that high-priced asset to the market. Conversely, when the market owns an asset that it doesn’t want anymore and is willing to sell it at a hugely discounted price, an accommodating investor will buy that asset from the market.
Another way to think of accommodative investing is that it is very similar to the old rule of thumb to buy low and sell high. It is also a large part of what we do when we rebalance a portfolio — paring assets that have outperformed and adding to assets that have underperformed.
While an accommodating investor may know what they should do, it’s often easier said than done. Consider an extreme example by thinking back a little over four years ago to the height of the pandemic. Remember in April 2020 when entire industries shut down, travel nearly vanished and the price of oil was -$37 a barrel1? Investors were in such a panic that they were willing to pay others to take possession of energy assets. Accommodating investors knew they should be adding to their oil positions, but everything at the time screamed beware.
Can you guess what the best-performing broad asset class has been since then? Many, myself included, might guess that U.S. Large-Cap Growth/Nasdaq stocks would have performed best, and they did very well, up about $155%2. But Master Limited Partnerships, a common structure for oil, gas and pipeline companies were up 360%, while the largest energy ETF was up 276%3.
This is not to say that everyone needs to buy depressed assets in their portfolio to be successful, but it is an extreme example of how the principle of being an accommodating investor can work in practice. It also highlights the principle of letting prices guide decision making. Future returns are determined by: (1) future cash flows and (2) the current price of an asset. We can only make an educated guess as to what future cash flows will be. However, we know today’s price of an asset and prefer to make decisions based on what we can know.
In 2024, the market is willing to pay extremely- high prices for AI-related assets and is guessing that future AI cash flows will be multiples higher than the cash flows generated by all emergent technologies in history. Maybe that will happen, or maybe AI profits will be a dud, or maybe — more probably — they will fall somewhere in the middle as the tool itself is incorporated into the economy just as the internet was 20 years ago. History says that higher-priced assets have lower-expected returns, on average, and lower-priced assets have higher-expected returns. This is why we recommend being an accommodating investor. If you have any questions, please contact your Exencial advisor.
Sources
- CNBC.com (June 16, 2020) - How Negative Oil Prices Revealed the Dangers of the Futures Market
- Morningstar (data from 4/1/2020 – 8/31/2024) - Russell 1000 Growth Index +152% and Invesco Nasdaq Trust (QQQ) +157%
- Morningstar (data from 4/1/2020 – 8/31/2024) - Alerian MLP Index +360% and SPDR Energy Select Sector (XLE) +276%
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
Nasdaq is a global electronic marketplace for buying and selling securities. It operates 29 markets, one clearinghouse, and five central securities depositories in the United States and Europe. Most of the world's technology giants are listed on the Nasdaq.
Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity securities. It includes the Russell 1000 index companies with higher price-to-book ratios and higher forecasted growth values. It is market-capitalization weighted.
Invesco Nasdaq Trust or Invesco QQQ ETF is an exchange-traded fund that tracks the Nasdaq 100 Index. Because it passively follows the index, the QQQ share price goes up and down along with the tech-heavy Nasdaq 100.
Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).
SPDR Energy Select Sector is one of the eleven Selected Sector Indices from the S&P500® Index, which seek to track major economic segments and are highly liquid benchmarks. The S&P 500® Index (S&P 500®) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
