Being a US equity investor over the past several years has felt glorious. The S&P 500 has trounced the competition provided by other major developed and emerging equity markets. Over the last 7 years, the S&P is up 173% (15% annualized in nominal terms) versus MSCI EAFE (in USD terms), which is up 71% (8% annualized), and poor MSCI Emerging, which is up only 30% (4% annualized). Every dollar invested in the S&P has compounded into $2.72 versus MSCI EAFE’s $1.70 and MSCI Emerging’s $1.30. Diversification theoretically sounds good, but as Yogi Berra said, “In theory there is no difference between theory and practice, in practice there is.” Diversification in this particular instance seems good in theory but not so much in practice.
So, shouldn’t we agree with Trustee Smith and throw in the towel, index all of our equity exposure to the S&P 500, and call it a day? If our goal is compounding capital for the long term, which it is, we would not just say “No,” but something akin to “Hell no!”
- Matt Kadnar & James Montier (GMO)
I never miss Montier’s stuff. He’s been skeptical of the rally in US stocks for a lot of the way up, as has been well documented, but that doesn’t mean his viewpoint ought to be dismissed out of hand – lots of very smart people have missed out for various reasons. Many of their reasons had some merit and still do.
Hit the jump above to read the whole paper, hot off the presses.