To Infinity and Beyond

The stock market is an extrapolation machine.* The current trend is projected further and further into the future and in our minds, it stretches beyond the present and well into tomorrow.

This extrapolation applies to more than share prices. It also affects the economic backdrop, rising profits, and high margins. Today’s success is expected to continue tomorrow.

There are several reasons for this. The economist John Maynard Keynes already observed that in times of great uncertainty, people project the status quo into the future. What we cannot calculate rationally, we hand over to our “animal spirits,” a blend of instinct and intuition, seasoned with a decent dose of drive.

In other words: tomorrow will look much like today. And every passing day that confirms this view makes us more confident in our forecast.

Then there is another very human factor: the desire never to be wrong alone. As long as we extrapolate with the herd, we are less exposed. That also keeps career risk under control. Those who move in step with everyone else rarely lose their jobs. Those who take their own path take more risk.

What does this mean for stocks?

One option would be to ignore the main theme dominating the daily headlines when managing one’s own portfolio. In hindsight, simply ignoring the internet and every company in the sector was the right decision at the end of the 1990s. But professional asset managers who had no exposure to that theme at the beginning of 2000 had very few clients left.

And today? Should investors avoid all stocks connected to developments in artificial intelligence? How long would clients support that? Would they even accept negative performance while the big technology stocks keep setting new highs and the neighbor is happily talking about her gains? And would that make any sense?

At Gutmann, we have long invested in some of the most important companies that are now benefiting from AI. They are a firm part of our equity strategy. Still, we would not feel comfortable concentrating half of an equity portfolio in just a handful of names. We value balance and regularly trim the biggest winners. At the same time, we add to companies that the market has punished in the short term. Naturally, only when we believe in their long-term prospects.

* The concept of the extrapolation machine goes back to the U.S. investor Jeremy Grantham, who founded his own firm in 1977 and has seen a thing or two since then.