CHAPEL HILL, N.C. — We are now officially in a “kids market.” Invest accordingly.
The concept of a “kids market” was introduced by Adam Smith, the pseudonymous author, in his classic book from the late 1960s entitled “The Money Game.” He used that phrase to refer to an investment environment in which the advisers and traders making the most money are those too young to remember the last bear market.
That would certainly appear to be the case today. The 2007-2009 financial crisis and bear market is now more than eight years in the past. Anyone younger than in their mid-30s probably wasn’t even out of college or graduate school during that bear market, and therefore has little or no direct investment experience of a severe bear market. Their attitudes toward downside risk are entirely different from those of us who lived through that crisis, the bursting of the internet bubble, or other bloodbaths of investment history.
These “kids” are often the ones making the most money in stock market right now, handily beating the S&P 500 SPX, -0.10% .
And guess which stocks are favored by these “kids” who have no firsthand memory of a major downturn: highflying growth stocks such as Netflix NFLX, -3.38% (up 52.7% year to date), Facebook FB, +2.92% (up 43.9%) and Amazon AMZN, -0.65% (up 40.4%).
The average value stock, in contrast, as measured by the S&P 500 Value Index SP500V, +0.12% , is up just 4.8% so far this year. Value stocks are those likely to perform the best during a downturn, and are favored by those of us old enough to remember the damage caused by a severe bear market.
We look outdated and old-fashioned during kids markets. We have this annoying habit of reminding everyone that trees don’t grow to the sky, and that values matter.
What a drag; who invited us to the party?
To illustrate how “memory can get in the way” of kids markets, Smith described a character he called The Great Winfield, who exploited kids markets by only hiring investment managers who weren’t yet 30 years old: “The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible,” Winfield says. “Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us” who are old enough to remember.
Consider the investment newsletters I monitor with the best risk-adjusted returns over the trailing 30 years (Investment Quality Trends, edited by Kelley Wright) and trailing 20 years (The Buyback Letter, edited by David Fried). Both of these ranking periods are long enough to encompass not just one but at least two severe bear markets. And neither of these top performers is currently recommending Amazon, Facebook or Netflix.
To be sure, kids markets can remain that way for some time. Eventually, however, the kids will encounter a bear market and, in the process, become older and wiser like the rest of us.
Until then, they no doubt will continue to dominate the performance sweepstakes. If the future is like the past, however, the older and wiser veterans will enjoy the last laugh over the longer term.