March 2025
Theodore Roosevelt famously said, “Comparison is the thief of joy.” Observing children at play reveals that making comparisons seems hardwired into human nature. A toy that was a prized possession yesterday suddenly seems inadequate when a friend has a new one today. With teenagers, prized objects become a little more expensive, such as phones and shoes. As adults, the coveted “joy thieves” can be cars, homes, and surprisingly, even investments…
This tendency to compare and feel regret is deeply ingrained in investor behavior. A common pitfall is judging past decisions, not by objectively assessing results against original goals, but by comparing returns to what could have been achieved in hindsight. Over the past two decades, we can recall many instances where investors often wanted more concentrated positions in emerging markets, real estate, or alternative strategies after those asset classes significantly outperformed.
In recent years, many have lamented not owning a portfolio solely consisting of U.S. technology stocks or, even more outlandishly, owning a portfolio exclusively consisting of Nvidia, GameStop, or Bitcoin (assets that have dramatically outperformed over certain time periods).
This “hindsight bias” can trap investors in a cycle of regret and unrealistic expectations, leading to counterproductive decisions based on the belief that past winners will remain winners indefinitely or that the next “hot stock” can be easily identified.
The Blessing and Curse of Diversification
Comparison-related concerns naturally arise for investors with diversified portfolios. There will always be something one wishes they had owned more or less of. Diversification is both a strength and a frustration: it provides exposure to multiple investment themes, playing out over different time frames while reducing risk, but it also invites comparisons to more concentrated strategies that, in hindsight, would have delivered higher gains.
The issue is especially pronounced today due to the dominance of a handful of U.S. technology titans. Investors frequently compare their portfolio results to indices heavily weighted toward these companies. As of late 2024, the seven largest companies in the S&P 500 were valued at approximately $17.7 trillion, representing 35% of the index’s value – a historic concentration, up from about 24% just two years prior.
These seven companies share a commonality: many investors anticipate they will be the leading beneficiaries of the artificial intelligence revolution. Historically, technological innovations have often reshaped rather than solidified corporate leadership. The automobile disrupted railroads, radio and the internet undermined newspapers, and streaming transformed traditional media conglomerates. Yet today, many investors assume that AI technologies will reinforce, rather than challenge, the dominance of existing tech giants, entrenching their high profits for years to come. This assumption is speculative, in our view, and has been called into question by recent reports of overseas competitors producing cutting edge AI models at a fraction of the cost of incumbents.
The End of an Era?
Particularly in an upward-trending market, the rear view mirror approach can become self-perpetuating. Certain stocks soar, investors pour money in, and those stocks post huge gains again, so now more investors pile in to the trend. However, when a reversal happens, it can be crushing to returns.
It is certainly hard to predict seismic market shifts, but several thematic trends in the U.S. appear to be reversing: an influx of low-cost labor, a strong U.S. dollar, and stable diplomatic relations with key trading allies. In the markets, one trend that began in 2014 is the outperformance of U.S. markets relative to the rest of the world. Though it is hard to imagine now, there have been time periods when this was not the case, including the run up to 2014.
Now that the phrase “American Exceptionalism” has become firmly embedded in the financial world’s lexicon, would it be surprising if U.S. markets were to lag over the next few years? It is worth noting that through the first two months of this year, European stocks were up 12%, compared with a 1.5% gain for U.S. stocks. Moreover, European stocks notched that impressive gain with only ~75% of the volatility of their U.S. counterparts. It’s too early to say if this is a turning point, but asset class performance will change if we are in a “new era.”
The Power of Patience
Like learning to appreciate their own achievements rather than constantly measuring against each other, investors should resist the urge to compare their returns to what could have been. For 99% of the people we speak to, the goals are remarkably similar – essentially financial security and freedom. One can formulate an investment plan to meet one’s objectives, allocate capital based on forward-looking analysis, and then evaluate the plan’s effectiveness over market cycles. This philosophy is less dramatic, less stressful, and according to academic research, more successful. Over the span of decades, we think most investors would reflect back that they woulda, coulda, shoulda chosen that strategy, as opposed to one based on comparing a portfolio’s results to an ever-changing list of market darlings.
All market data is sourced from Bloomberg, Factset and ycharts.com. The commentary is for informational purposes only and the opinions expressed herein are those solely of Hamilton Point. Hamilton Point reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities or strategies discussed herein will be included in or excluded from a client portfolio. It should not be assumed that any of the securities, strategies or internal studies discussed were or will prove to be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. An investment in our strategies is subject to investment risk, including but not limited to, the loss of principal and may not be suitable for all investors. This is not a recommendation to buy or sell any particular security and should not be considered financial advice. Past performance is not indicative of future results. A full description of Hamilton Point and its investment strategies and advisory fees can be found in Hamilton Point’s Form ADV Part 2 which is available upon request or at the Investment Adviser Public Disclosure website. Hamilton Point is an investment adviser registered with the U.S. Securities and Exchange Commission, though such registration does not imply a certain level of skill or training. Hamilton Point’s principal place of business is in the State of North Carolina. HP-25-12