The entrepreneurs we love are independent thinkers. Most people can only see what is - what has just happened and what's happening right now. But entrepreneurs see possibility - they see things that others do not. That makes them different; they are not part of the herd. Starting a business, growing it, nurturing it – all of it is uncomfortable because for most of the journey the herd does not approve; the herd doubts; the herd questions.
Independence, then, is defined not only by seeing possibility but also by dealing with discomfort.
Public markets are the opposite of independence. Here are two examples:
The first chart shows assets under management since inception for ARK Investment Management according to Morningstar. You can clearly see FOMO taking hold in 2020 as anything associated with disruption sent investors into a tizzy. ARK’s assets peaked at over $50 billion in the first quarter of 2021. By the end of 2022 assets had declined to $10 billion.
Not surprisingly, flows grew as returns jumped (between 1/1/2020 and 2/12/2021 the return for the ETF was an incredible 212% according to Morningstar1). Also not surprising: flows reversed as performance reversed (2/12/2021 – 12/31/2022 return for the ETF was -80%). The herd in action!
We’re seeing similar behavior this year as investors latch onto anything “AI” – driving a very small group of stocks to prices that imply a very rosy future.
But this herd behavior is not limited to high-risk-high-reward (called “high beta” in finance lingo) type securities. It can also be found in bonds.
Check out the chart below which is taken from our client presentation on the economic and investing landscape2. Flows into bond mutual funds and ETFs are shown in red (taxable bonds) and green (municipal – typically tax-exempt - bonds) based on the trailing 6-month period. In the second half of 2020 there were enormous flows into bond funds and this continued into 2021 – right after interest rates were pinned to the floor by the Federal Reserve to combat the severe decline in economic activity as a result of the pandemic lockdowns. What happened in 2022? Rates went up – a lot. How did bond investors react? They ran for the exits, pulling enormous amounts from bond funds just as interest rates (and potential future returns) reached their highest levels in more than a decade. The herd in action!
Independence – life away from the herd – is very easy to talk about and very hard to do.
Independence – seeing possibility AND dealing with discomfort – is a trait that is only found in a relatively small group of people. Those are our people.
1. Data source: Morningstar Advisor Workstation Office
2. Data source: Investment Company Institute as of 4/30/2023
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