Still can’t believe it, but it is already time for another year end review and outlook for the year ahead. Who’s ready to rock and roll?!
I’ve been contemplating this update for going on a month already, and find myself still suffering from a serious case of writer’s block this time around. I even skipped the 3rd quarter update – largely for the same reason – in hopes that I would find myself shot out of a cannon for this one. Still, I can’t quite put a finger on what I most want to communicate this year. So, as is sometimes the case, you and I will be learning together just where my mind wanders below…
2025 has been a great year – and I mean a great year – around here. From a business standpoint, which is what this is supposed to be about, we are “very pleased” with how client portfolios have performed this year. Not only the returns themselves, but the even more so the manner in which they were achieved. I wish I could expand, as that statement understates my true feelings, but that is all compliance will allow. No biggie. We hope you are “very pleased” as well. And I shall keep my snarky comments about the SEC to myself on this fine day – so as to keep the positive vibes flowing…
Kids are doing great. Reagan just turned 16, and gets her driver’s license next week (lookout 2026)! Logan is now 14, and is 6’5”…in 8th grade! Both have been working their tails off at their chosen sports (softball and hoops). When they kept telling us that “sports are just different in the south”, I now understand what they meant. They are maniacal about it down here (and that is not always a good thing). And while Lauren and I are certainly not the parents that need our kids to excel at sports – we definitely ARE the parents that understand what sports can do for instilling confidence, work ethic, the ability to deal with others, learning how to win and lose, and on and on. So, we are beyond thrilled to see their dedication to something other than a screen, regardless of outcome. And before I get yelled at, yes, they have equally dedicated themselves in the classroom! Finally, to add icing to the cake, Mom moved from AZ to Mississippi to be closer to us this summer. So yeah, it’s been a great year – and we are blessed. I hope 2025 has been equally great for each of you – and for those who it has not – I pray that the year ahead will be.
You see what happens when I can’t come up with a clear outline for these updates upfront??
Moving away from personal updates, and forward to what I am supposed to be writing about. 2025 has been beyond great in another way: how much we have learned this year. I’ve written before about my belief in the old adage “never stop learning” – especially in this business - no matter how long we have been doing something (now 30 years in this case) and regardless of the outcome that you are learning from (good or bad). It’s more enjoyable to learn from good outcomes, but we often learn more from the bad ones it seems…
As you all certainly know by now, Dave and I have for a very long time struggled with the idea of owning stocks (in size) when valuations of said stocks get frothy. We have discussed the reasoning behind this countless times before, so I will skip now. Our goal has always been to achieve reasonable risk-adjusted returns for clients. What that means in non-technical terms would be best described as “we are trying to make as much money as we can for you, while minimizing (not eliminating) the amount you might lose when things (markets) go south”.
So, managing “risk” or “return” on their own is really not rocket science. We could theoretically put all your money into cash, and effectively remove ALL risk of you ever having losses. Conversely, we could (potentially) maximize your return by putting ALL your money into stocks. Again, both are pretty simple on their own, though neither is very wise. The hard part – and what you pay us for - is trying to blend the two. “I want to earn as much as possible on my money, but I don’t want to lose it”! I’m guessing every single one of you reading this would agree with that sentiment. And this is where it gets more challenging – increasingly so in the rather bizarre environment we have found ourselves over the last decade plus.
Our struggle early on was more on the return side than the risk management piece. For the sake of brevity, I won’t delve into the technical reasons for it. As a result, we found ourselves fixated on how we could (potentially) increase upside, while (importantly) maintaining a similar risk profile. This was a long and painful learning experience. Ultimately, and certainly not exclusively, it taught us the value of “alternative” assets/strategies toward this end. Trend, market neutral, long/short, managed futures and commodities to name a few – most of which play a major role in our portfolios today.
On the risk management side, we’ve (quite surprisingly) only had a handful of instances to learn from over the past 15 years. For the first two – a 20%ish correction at the end of ’18 and the 30%+, 3-week correction at the onset of Covid – we found ourselves “satisfied but not thrilled” with the results. This was largely due to something we mathematically understood – but needed to see play out to have drilled into our feeble brains. The “something” was that treasury bonds could not possibly provide the layer of protection that everyone was so convinced of (see: 60/40 models) – given how much we had manipulated interest rates (lower) over time.
The next 2 instances came in 2022 (the only one to last more than a couple of months), and then the first quarter of this year. We were elated with our results in both instances – in no small part due to what we had learned from the previous two. In fact – speaking of 2022 – probably the biggest thing we learned was confirmation of just how many investors and advisors alike had (have) adopted the “60/40 (60% stocks/40% bonds allocation), set it and forget it” mindset. How anyone would have 40% of their portfolios subject to duration risk - when there was virtually no room between then current rates and 0 - escapes us. That fact remains alarming to us from a societal standpoint – especially now that it appears 70/30 appears to be the new 60/40 – especially given the current landscape coupled with an aging population. But that too has been discussed before, so we shall leave it at that for today.
Moving on, what you experienced in your portfolios this year was a combination of us adapting our thinking due to these lessons learned prior, and…..luck. You might not want to hear that, but I always strive for honesty above all else. The portfolios in place were due to endless thought, discussion and analysis amongst the three of us – we will take credit for that part (it is our job after all). Still, if you circle back to last year, were we projecting 100% returns for gold related positions, or certain tech companies based in China? We were not. While we are not surprised that they “worked” (why else would we own them?), it was certainly luck that they performed as well as they did. Now, so as to not be too self-deprecating here, it seems like a good time to point out that the next time we have an abnormally “bad” year on your behalf – it too will most likely be a combination of some poor positioning on our part and…(bad) luck.
I started this section mentioning all of the opportunities we had to learn this year, so let’s get to that, in no particular order of importance…
First, you may have noticed that we made several trades in individual stock names during the year. The reasoning behind each was some combination of valuation and technicals – our favorites being those that align on both fronts. We didn’t learn to look for these opportunities only this year – we just happened to find more of them. What we did learn, however, was two-fold. First, because there were more of them, we saw in real-time the difference that even small positions in more volatile names could make to overall performance. Importantly, even though they virtually all (somehow) worked this year, we can extrapolate to what that would look like if they went the other way. Same impact, just pain instead of gain. Ouch.
Second, we realized that by using stop-losses – meaning that we could “define upfront how much downside we are willing to take on a position” – we could accomplish multiple goals. For one, it allows us to take more of these shots – now that we better see the potential impact of doing so – while keeping our downside exposure fairly consistent. Next, and arguably more important – in an environment where we want increasingly less to do with the indices – it would provide an off-ramp for reducing those allocations while retaining similar (though admittedly much less correlated) upside potential. Again, we did not just learn of this strategy this year (less anyone think we are just now learning how to use a stop-loss!) – it was more learning how it might better fit into what we are already trying to accomplish.
To expand – and using a hypothetical to illustrate - a 1% allocation to a position that goes up 100% adds the same total return (1%) to a portfolio as having a 10% allocation to an index fund that goes up 10%. By choosing the former, that frees up 9% of the portfolio to invest in other areas – which has finally become useful over the past few years, as we can now earn 3.5%+ (was 5%) on that money by investing in risk-free T-bills. Of course, the opposite is true as well – a 1% position losing 100% does the same overall damage to a portfolio as having 10% in an index fund which loses only 10%. But that is where the stop-losses as discussed above enter the picture – as we can (mostly) “pre-determine” our loss exposure on that 1%, while we would tend to view allocations into the indices more as a long-term holding, and forego any stop-loss orders as a result. And to reiterate, it is the indices that we perceive to have little to no long-term value, given current structure (concentration) and valuation concerns.
Now, you might find yourself thinking “brilliant – sounds great to me!” Of course, it is never as easy as what I just described. Obviously, correctly selecting an individual position with 100% upside is much more difficult than getting an index to rise only 10% - but this is where the current environment comes into play. While I am very strongly assuming that most of you do not see this on the surface, we are (once again) operating in an environment where animal spirits are in full force. As such, there is a lot of crap – for lack of a better term – that the “finance bros” on X are pumping. More importantly, this type of environment can lead to “non-crap” positions having (potentially) higher than normal upside if/when they become “momentum plays”, as the traders/algorithms push their prices higher. Still, to reiterate, this is not an easy (or even realistic) strategy to use on its own – and keep in mind that the hypotheticals as presented above are intentionally over-simplified (and dramatic) for illustrative purposes. As such….
Please do not take any of the above as a signal that we have moved from “long-term, tactical allocations” to day-trading your accounts! I can assure you, assuming you even need this assurance, that is not the case. But purely by coincidence, 2025 taught us how using the above-described – even in very small amounts – can complement the strategies already in place.
Quite possibly the most important observance for us this year was not actually something that we learned – but rather something that was further “confirmed” for us (and much more importantly for you). As you know, our long-standing belief has always been that the best (not only) way to compound money – particularly in this type of environment - was to prioritize the minimization of losses rather than focusing on maximizing returns. And we become increasingly adamant on this the closer a client gets to retirement. Let me simplify that. As Uncle Warren (Buffet) said regarding how to best build wealth: “Rule #1 – don’t lose money. Rule #2 – do not forget rule #1.” When you are talking about building wealth over time through compounding returns – believe me, that rule matters more than you might think!
With that in mind, 2025 blessed us with a perfect example of this concept – and was nice enough to package it up cleanly into one calendar year for easier visualization. Market drops 20% peak to trough early this year, and your portfolios hardly budged – yet you can see how much of the total YTD upside you have captured as the markets viciously rallied ever since. Those YTD returns are in no small part due to avoiding the large losses early on. We could already look at 2022 thru 2024 and see similar results – it’s just easier when it occurs within the span of one calendar year. So, at the end of the day, it was very helpful for us (you) to have another round of “real-life” results to help confirm that we are on the right path toward what we are trying to accomplish.
Last, but most certainly not least, is what we learned about many of you. I was astounded – no, I was dumbfounded – by the number of phone calls I have received from clients this year thanking me “for their returns”. I did not see that coming. First off, I appreciate every one of the calls – I truly do! But interestingly, there was not a single phone call in April – when many clients were still showing positive returns even with the S&P down some 20% from its peak. Similarly, very few of those sentiments were shared with us during 2022, when most clients suffered very minimal losses in their portfolios - even with the “rest of the world” (the 60/40 crowd) down 20% or more. Please let me explain why I bring this up, and why it is important (for us). And no, it’s not because I am butt-hurt (to borrow a quote from my kids) that I didn’t receive any calls in April…
There have been many studies done over time showing that “greed” weighs heavier on investor psychology than “fear”. I have always pushed back against that, as I have witnessed front and center what it looks like when fear sets in. Still, I think I learned this year that the academics might be right on this one - and if true, that is extremely helpful for us to understand. A big part of our job is managing psychology – “fear” and “greed” - so that we are never losing sight of the only thing that truly matters. That of course being your long-term goals. And while this newfound information does nothing to alter the strategies we employ on your behalf, it does help us to better understand what our clients might be experiencing during different market environments.
Note: PLEASE understand that I did not just call you “greedy” for wanting returns – everyone (myself included) wants returns! The studies I reference equate “greed” with “returns” and “fear” with “losses”. So when they say “greed is stronger than fear”, what they are really saying is that the emotional response around upside returns tends to be stronger than the emotional response to losses. As such, my experience this year lends credence to the assertion that “greed” (FOMO) is stronger than “fear” with many investors – and if true, that is important for us to remember going forward. I still push back, by the way – it’s just been a minute since folks have been reminded what market driven fear really feels like. And that is entirely normal at this stage of the cycle…
Well, as much as I don’t want to, it’s about time to say goodbye to 2025 and move on to what might lie ahead. And it just now hit me as to why I was having such a hard time writing of late:
I have absolutely nothing new to say about next year, that I have not said 100 times before.
But the strength of that sentiment is somewhat revealing. You don’t understand how much I look forward to and enjoy writing these updates – the thought and reflection that comes from writing is second to none for me personally. And with all the good vibes I was feeling as I simply started writing – that sense of joy returned. Until right now, where I am tasked with trying to logically express to you what might be to come in 2026 – knowing that the investment environment itself remains entirely illogical on so many fronts. That joy just went buh-bye. Ugh.
Shall I discuss valuations? Shiller PE recently hit 40. Yay. There have been several analyses we have come across showing that “using the most ‘useful’ valuation metrics – and averaging them together – this is the most expensive market in history”. Uh huh. We could talk forward PE, trailing PE, price to sales, price to free cash flow or price to anything else – the analyses will be the same. No one in their right mind would buy stocks (in size) right now – in the name of “long-term investing” - especially with the current backdrop/structure to boot. But stocks will keep going up, well…until they don’t.
How’s that for award-winning analysis?!
Should we discuss politics, and what it might mean for your money in the year ahead? Imma (Mississippi slang) take a pass, as always for self-preservation purposes. Maybe I should talk about private credit or the “shadow banking system” – both unregulated, and no one has any idea what is actually going on as a result. The Oligarchs and The Fed? I haven’t mentioned them yet. How about debt and deficits, or the fact that some 40% of the S&P 500 index that people own almost exclusively these days is now concentrated into just 10 names? Inflation, and the ever-growing divide between the “haves and have nots” – leading to the populism and social unrest that we have all now grown to view as normal? I’ve got at least another 5 pages in me discussing all the “risks” that remain out there – risks that “they” (intentionally) created by the way – and concluding by reminding you that the oligarchs have officially turned financial markets into casinos, as I (unfortunately) have so many times before.
Nah. Not today. It is depressing for me to write it, and it has to be equally depressing for you to read it. It is what it is, and neither you nor I can control it. In fact, it’s always this way once we get to this point of the market cycle – though admittedly, this one has hit a whole new level of bizarre on so many different fronts. Of course, that too has been true each and every time we moved closer to the end of cycles past. Now, if you at all feel slighted by my refusal to rehash any of these items in greater detail here today - feel free to re-read the last 5+ years’ worth of updates on our website. It’s all there in the blog section. The more things change, the more they stay the same – very true in this instance…
So no, I’m not going to insult your intelligence today by pretending I know when this nonsense will finally come to an end (if at all). Instead, I’m going to close with my favorite quote of 2025 – a quote I think perfectly summarizes both our thoughts on the year ahead, as well as the main emphasis of this update. The following came from Cliff Asness (search him: you likely own some of his funds), during a podcast that I happened to be listening to:
“It is imperative to always keep an open mind. Just don’t keep it so open that your brain falls out…”
I’m sorry, but that line is so freaking good. We don’t know what the current clown show has in store for 2026. As is always the case, we shall find out together. Our minds remain open to any and all outcomes – as we continue to learn and adapt, while always playing the hand that is dealt. At the same time, please do not confuse our very intentional omission of the many challenges that our economy/markets face in the coming year, for something that it is not. The “intention” behind the omission is not lack of content, nor is it lack of awareness – that I can assure you. Instead, it is for the sake of all of our sanity, and for the sake of honesty. It’s been a great year, and I’d rather focus on that today. Still, just so we are clear:
Yes, our minds remain open. But rest assured, we remain acutely aware of the environment in which we are operating, and all the red flags that remain present. In other words, our brains – for better or for worse - most certainly have not fallen out.
And we plan to keep them that way, as we navigate on your behalf whatever is to come for the year ahead and beyond…
With that, we want to wish you and your loved ones the absolute best for the holidays – and an over-abundance of health, prosperity and joy for the year ahead! And, always most important, we thank you for the continued trust and confidence you have placed in us.
Sincerely,
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Statements of forecast are for informational purposes and are not guaranteed to occur. Trends discussed are not guaranteed to continue in the future.
All performance referenced is historical and is no guarantee of future results. Investments mentioned may not be suitable for all investors.
Equity investing involves risk, including loss of principal. No strategy – including tactical allocation strategies - assures success or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major indices.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The fast price swings in commodities will result in significant volatility in investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Any discussion regarding gold or commodities in general is referring solely to the asset class(s) themselves – we do not directly hold physical commodities or gold.
Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor.