In his latest Q1 2024 commentary, Bill Nygren explains why investors shouldn’t sell after the S&P500 records new highs. An investor selling at each new high would have missed substantial gains, as holding throughout would have multiplied an investment over 200 times. Here’s an excerpt from the commentary:
Nygren: In the past 50 years, selling after the S&P 500 reached a new high would have allowed an investor to avoid four very painful declines: 44% after the dot-com bubble popped in 2000, 38% entering the great financial crisis in 2007, 19% in the 2020 Covid-19 shutdown, and 25% in 2022 when inflation and interest rates sharply increased.
As with many market-timing schemes, the positive result from those correct calls has made selling after a new high a popular strategy.
But if we look back at the past 50 years (600 months), the S&P 500 achieved a new high in 156 of those months—or 26% of the time. It’s much more common than people think.
Despite those four very timely sell signals, selling all the new highs would have given many more sell signals that destroyed value.
An investor who sold every new high and waited for a lower re-entry price would have missed the opportunity to make more than 200 times their money by just buying and holding the S&P 500 for 50 years.
As you know, we aren’t market timers at Oakmark because we don’t believe we can be right often enough to overcome the strong tailwind of rising equity values.
Our approach to new highs is to do what we always do: make sure we sell those stocks that have achieved our price targets and reinvest in stocks that are selling well below our estimates of value.
Today’s market is giving us ample opportunity to find stocks we believe are inexpensive, despite the elevated P/E ratio of the S&P 500. For example, since the beginning of 2023, the stocks we added to the Oakmark Fund had a median P/E of 12 times 2024 estimates, just over half the S&P 500 multiple.
We believe that by staying invested while always shifting the portfolio to the stocks that appear least expensive, we will achieve results far superior to moving in and out of cash.
You can read the entire commentary here:
Bill Nygren Q1 2024 Commentary
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