2025 Q1 Newsletter
By Jason Lesh, Managing Principal
From the very founding of this firm, Nick and I believed that we were uniquely prepared to embrace volatility, identify opportunities, and be strategic and calm in the face of chaos (obligatory and heart-felt thank you to our parents).
Who knew all of that would be tested as we began 2025. On again off again tariffs and a reshuffling of global relationships and alliances has provided the last thing that markets want: uncertainty. As Nick writes about in his commentary, we view managing risk in portfolios as one of our key responsibilities. And despite the S&P 500 being down 2.9% year-to-date through last night, every single client that we had on January 1st has positive performance on the year.
To be clear, there are lots of things that we worry about (tech valuations and a possible recession). And plenty of things are outside of our control (clear and cogent policies so businesses can plan accordingly). But what we aren’t worried about are our clients’ long-term portfolios. Just as we did in 2022, times like these allow us to plant the seeds for future returns and differentiate ourselves from the masses.
We will continue to be hyper vigilant when investing out clients money. Being mindful of risks that are overlooked while searching for opportunities that are missed amidst the noise. Nick and I are incredibly grateful for the trust our clients have placed in us and are thankful to be on this journey with them.
I hope this note finds you doing well. If after reading our commentary, please don’t hesitate to reach out to either of us if you have we can be of any assistance.
Wishing you all the best,
We view managing risk in investment portfolios as one of our key responsibilities. And this is one of the most challenging investment landscapes that I have ever seen. Many market participants have expectations for outcomes that are unrealistic in all but the most optimistic of scenarios. This is akin to speculation, not intelligent investing. This makes me very nervous. Our prescription is to look for the unloved, and under owned, where expectations are low and future returns look much more attractive.
Investor expectations for US stocks have never been higher. The unprecedented popularity of index investing and target date funds means many investors lack a deep understanding of what they own. This creates a scenario where investors are likely to be disappointed with future returns.
There were clear and present warning signs at the conclusion of 4th quarter of last year, (see our Pilot’s log on Investing vs. Speculation) and we are continuing to see those as we come to end of the first quarter of 2025, which include:
The highest proportion of investors' net worth ever, is now tied up in the stock market.
Large-cap US technology stocks comprise the largest share of the global stock market in history.
Nearly 40% of all stocks are owned by investors over the age of 70 and these investors will likely be reducing their exposure over the coming years.
International investors have committed unprecedented amounts of capital to the US stock market
The popularity of US technology stocks, is clearly the reason that so many have crowded into the large cap US stock market trade (see our most recent Pilots Log on AI). History shows us that even the largest stocks have their limits. Growth, valuations, and returns can only stretch so far. Time and again, we've seen investors flood into a single asset class, leaving little capital outside of it.
Overconfidence dominates, and skepticism is dismissed as folly—until reality sets in and returns normalize leaving investors disappointed.
To counter these risks, it’s worth exploring the opposite conditions. Instead of chasing overvalued assets with sky-high expectations, we consider assets or markets where pessimism reigns, and prices are suppressed.
An "anti-bubble" arises when asset prices are significantly undervalued despite strong fundamentals. This often happens due to investor fear, negative headlines, or a lack of interest in particular markets. Recognizing these undervalued opportunities can yield significant rewards as the market eventually corrects and aligns prices with true value.
What asset classes currently have low return expectations? What is under-owned globally? Where are investors hesitant or even averse to investing?
Some possibilities include:
European stocks
Natural resource stocks and commodities
Outdoor recreation and retail stocks
Chinese stocks
Japanese stocks
Small-cap US stocks
And there are more of course.
If any of these suggestions sparked an immediate negative reaction, that’s precisely the point. Low expectations and lack of interest often create undervalued prospects.
Within this list, we feel good about our current positioning in the arena of commodities and small-us stocks. We need better exposure to international opportunities.
Along these lines, we will likely be adding a new investment in the coming quarter. First Eagle is an international value investing firm founded by the immutable Jean Marie Eveillard, who amassed a legendary track record investing in international markets over 30 years. Matthew McClennan has taken over the helm overseeing First Eagle’s outstanding stable of talented investment managers. First Eagle recently launched an ETF for International Equity investing based on their expertise and multi-decade track record. We are excited to have a philosophically aligned manager helping us navigate the significant opportunity we see in international equities going forward.
At PWM, we focus on understanding investments deeply and trusting the people behind them, whether it’s a fund manager or a company’s leadership team. We believe in patience, waiting for these undervalued investments to gain traction in the market. By staying disciplined and seeking opportunities in overlooked or unloved areas, we position ourselves for success in a challenging investment landscape.
We appreciate you entrusting us with stewarding your hard earned, irreplaceable savings. If there is anyone you know or care about who you think might benefit from this information, please feel free to share it with them. As always we welcome your feedback, reactions and critique's. We hope you will find this information valuable and validating.
