Discussion with Apollo Lupescu, PhD

Recently our clients had the privilege of hearing Apollo Lupescu, PhD, Vice President of Dimensional Fund Advisors. Dr. Lupescu, who taught finance at the University of California, Santa Barbara, prior to joining Dimensional in 2004, leads efforts to communicate to financial advisors and individual investors the academic and theoretical foundations that undergird the investment philosophies and practices of Dimensional Fund Advisors.

Apollo Lupescu is gifted with the ability to make complex financial principles understandable without oversimplification. For more than an hour at a dinner hosted for clients and friends of Bernhardt Wealth Management, Apollo fielded questions and explained important concepts about the financial markets. A few highlights from his presentation follow.

Interestingly, Apollo opened his remarks on a very similar theme to that with which he began on his last visit here: US presidential politics. On the previous occasion, the election of Donald Trump had not yet occurred, and many in the audience were very interested in Apollo’s take on the likely effects in the financial markets of various election outcomes. As he did on his first visit, Apollo shared with his most recent listeners his firm conviction that investors should not focus on the effect that a particular president may or may not have on the financial markets. Emphasizing that the financial markets in the aggregate, and specific companies in particular, are valued based on the fundamentals of earnings, profits, and competitive practices projected well into the future, Apollo posed the question, “Which do you think is more relevant for the companies: President Trump’s policies, or the products they develop and the execution with which they bring the products to market?” Apollo made the related point that during one of the most pro-business presidencies in recent history–that of George W. Bush–the stock market returned an annual average of -2 percent (i.e., a negative two percent annually) during the eight years of his administration. Conversely, during the administration of Barack Obama, often viewed as hostile to business, the markets returned an annual average of 15 percent. The moral? Who is in the Oval Office does not matter nearly as much to the financial markets as many investors believe. Rather, a long-term perspective on the value of the thousands of companies that make up the markets is much more important.

Continuing on another theme he sounded at his previous presentation, Apollo discussed the importance of adequate diversification as the best protection against the volatility and unpredictable nature of the financial markets. Pointing out that predicting the price movement of any particular stock is very difficult, he surprised his listeners with two pieces of information: 1) the U.S. stock with the highest performance in 2016 was not, as many might expect, a tech stock like Apple or Tesla, but US Steel, which was up 300 percent; 2) the country with the highest-performing stock market last year was Brazil, up 70 percent, despite the country’s well-publicized woes, both financial and otherwise. Apollo’s takeaway was that while short-term performance of any particular stock or sector is usually difficult to predict, investors should instead be looking at the long-term trends and should cast their nets as widely as possible in order to increase their chances of success.

Further illustrating the importance of diversification, Apollo shared the historical returns of various market segments. “If my grandparents had invested one dollar in the S&P 500 index in 1926, when my dad was born, what do you think it would be worth today?” The answer was just over $6,000–despite wars, the Great Depression, and the financial meltdown of 2008 and the Great Recession that followed it. But then, Apollo asked for the audience’s guess as to what that same dollar would be worth today if, instead of being invested in the largest companies in America, which make up the S&P 500, it was invested in a basket of smaller-capitalization stocks. In this scenario, he said, the dollar grew to $27,000, during the same period. “The very first thing you should look at as an investor is whether you are only buying large companies or also buying small companies. The greater the perceived uncertainty, the greater the potential return.” He also explained the concept of valuation of companies on the basis of their ratio of stock price to earnings per share. “The ones that have a lower price compared to their earnings are called ‘value companies,’ and they tend to provide a higher return over the long term than companies with stock prices that are high in relation to their earnings.” Apollo pointed out that on the same historic basis shown above, a dollar invested in smaller companies with high value ratios grew to $78,000.

Apollo shared an analogy that he used in order to explain the concept of sector-based investing to his mother-in-law. “I was swimming in the ocean in Florida, and I realized I was above a school of fish. If I tried to focus on one particular fish and predict which way it would go, it was very difficult. But after a while, I began to see a pattern in the movements of the school as a whole.” Researching large amounts of data covering large sectors of the markets–large vs. small capitalization, value companies vs. growth companies, U.S. stocks vs. foreign stocks, and other differentiators–analysts like those at Dimensional Fund Advisors are able to determine larger patterns with much more precision. “I cannot tell you how each stock will move, any more than I can tell you which way a single fish will swim. But when I look at the sector as a whole, I have a much better understanding of what to expect.”

Bernhardt Wealth Management is deeply grateful for the research- and evidence-based insights of Dr. Apollo Lupescu. As part of our fiduciary approach to helping our clients manage their assets for retirement, education of children and grandchildren, and other important life needs, we are strongly committed to providing our clients with the very best financial thinking we can find. Dr. Apollo Lupescu’s perspective, and especially his simple, common-sense way of sharing it, helps us meet that important educational goal for those we serve.

Of course, we invite our clients to contact us at anytime to discuss investments, their accounts, or any wealth management matter.

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