Quality Growth Weekly Digest #15
The underrated concept of the "Expectations Treadmill"
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As we've noted in recent weekly digests, the market has been extremely volatile. Recession fears, emergency rate cuts, a return to a "Goldilocks" economy, rebounding retail sales—you name it, it’s all been on the table over the past three weeks.
Over the past month, the Nasdaq has fallen 4.4%, and the S&P 500 has lost 2.1%. Meanwhile, our portfolio, focused on four key areas—VMS serial acquirers, high-end luxury, consumer defensive, and defensive industrials—has gained 1.7%.
What does this mean? It suggests that during volatile periods, steady compounders tend to outperform, while they may lag during extremely bullish, low-volatility times. However, short- to medium-term relative performance shouldn't distract us from our long-term objectives. Lower volatility and stable internal rates of return (IRRs) allow us to continually invest in high-quality growth companies.
High volatility often leads to emotional decision-making, with investors attempting to time their trades. This can be detrimental to returns. While we're not aiming for the lowest volatility portfolio, we do focus on achieving competitive risk-adjusted returns (such as a strong Sortino ratio).