To Our Investors and Friends,
The S&P 500 increased 10.8% during the month of November, as news of effective COVID vaccines and an orderly US election created significant enthusiasm for a better 2021 and beyond. Oil blasted higher, up 26.7% in the month to over $45 a barrel on a view that increased demand was just months away. The 10-year fell a modest 4 bps in the month to .84%, while the spread between the 2- and 10-year contracted 6 bps to 68 bps. For the second month in a row, small cap value dominated the market. The Russell 2000 Value Index increased 19.3% in the month, helped by an enthusiasm for cyclical stocks. The Russell 2000 Growth Index gained 17.6%. Large cap indexes did a decent job of keeping up. The Russell 1000 Value Index gained 13.5% and the tech heavy Russell 1000 Growth Index moved up 10.2%.
Reflecting on all the changes we have had to live through in 2020, I am surprised by how so many investors are preparing their portfolios for a return to the world we knew. I think there will be many who pay a high ignorance tax in the years ahead. The Ignorance Tax is a concept we are all familiar with if we are honest with ourselves. A few months ago, my failed Do-It-Yourself efforts to repair a broken dishwasher resulted in me inadvertently destroying the appliance. I paid a few hundred dollars in an ignorance tax…the price paid to replace a dishwasher that was functioning well enough before I got my hands on it.
It is not just the not-so-handy that have been paying an ignorance tax this year. Ego, emotion, and bias are leading many to make poorly informed decisions that are costing them small fortunes, their jobs, and even their lives. The age of COVID is transforming the world incredibly quickly, and many of us are paying a high ignorance tax in our refusal to accept these changes as our new reality. Our very reaction to COVID – many refusing to change their day to day lives – is the most obvious sign of a resistance to accept this brave new world.
In Ludwig and Hess’s Humility is the New Smart, the authors suggest that we need to take our time responding to the onslaught of new data in order to make better decisions. The old way of reacting quickly based on pre-conceived bias or ego will prove even more costly in the era of the fourth industrial revolution. This has been especially true in 2020. COVID is forcing a change in how we work, engage with friends and family, and even vote in elections. Ignoring these changes now and in the future will certainly result in a high Ignorance Tax in the years ahead. The simple assumption that the world will return to normal, the way it was in 2019, at any point in the future ignores all the new data supporting the many changes that have already taken place in our economy. We will spend our time understanding this transformation so that we can capitalize on the future that is yet to come.
All the Best to You,
AKW