Why not just buy what’s working?
Since early February some of the stocks in Dock Street portfolios have fallen in price, while other sectors of the market have reached new highs. Given the outsized gains in our portfolios in 2020 this shouldn’t come as a surprise, but when markets move in a hurry, it’s always a little surprising.
The two best performing sectors of the market this year have been financials and energy, as the world economy continues to surprise on the upside. So why not buy into these currently favored industries?
The table below illustrates why we are not tempted. The table compares annual sales figures for Exxon-Mobile and Google going back 15 years. Strangely their 2020 sales were nearly identical, but they arrived there along very different paths.
The market is now betting that Exxon-Mobil’s business will improve in 2021 on rising oil prices, which reflect stronger economic growth as lock-downs are reversed. That’s a reasonable speculation, however, the long-term prospects for fossil fuel companies remain grim.
In contrast we believe Google can continue growing in a steady fashion for several years into the future.
And the financial stocks? One thing both energy and banks have in common is a nasty regulatory burden. The financial crisis of 2008 prompted the authorities to neuter the banks to prevent a similar disaster in the future. Getting rich in banking by taking large risks has now been effectively outlawed. And while this is good for the overall financial system, it’s not great for shareholders.
The same for energy. Every government in the world wants to cut back on fossil fuels and investors who prioritize the environment are actively selling the industry. Oil is the new tobacco.
It is likely that these two industries will have a good year in 2021, but attempting to trade what we own to make a quick buck for a year or two seems like a risky move to us. Referring back to the table above—we don’t think Exxon will be able to keep pace with Google over the long term.
Daniel A. Ogden