In this Year-End Letter, Austin Root, Chief Investment Officer at SAM, reflects on the biggest lessons from 2024 and shares his outlook for 2025—where the markets may be headed and how SAM is positioning for the opportunities and challenges ahead. With a dynamic start to the year, it's more important than ever to take a thoughtful, strategic approach to investing.
📩 Read the letter below and sign up for our Q1 Investment Webinar to hear Austin and the SAM investment team dive deeper into their 2025 market outlook, investment strategies, and key themes to watch in the months ahead.
SAM Investment Webinar
🗓️ Date: Tuesday, February 25th
⏰ Time: 4:00 pm EST | 1:00 pm PST
Dear Fellow Investor,
“I wasn’t wrong; I was early.”
In my nearly three-decade career analyzing and investing in the markets, I’ve heard a lot of excuses for investments that performed poorly. The rationalization above is among the ones I’ve heard most – especially when looking back and the facts have changed. If only you’d waited to put on that losing trade until now, it sure enough would be a winner.
As you might expect, I hate this excuse. And I bet that you do too. All too often, being early is the same thing as being wrong, especially if it leads to permanent loss of your investment principal.
But I think it’s an important investor mindset to consider, particularly now. Economists have been calling for an imminent recession for more than two years. Investment banking strategists and independent financial publishers alike have been calling the top on the market for years as well. And they’ve been early and wrong the entire way as the economy and markets have continued to power higher. But… eventually they’ll be “right.” Economies and asset prices don’t grow forever. Corrections are inevitably coming.
So, as we move further into 2025, it’s important that we’re cognizant of these eventual shifts. That we balance our efforts to continue generating positive returns in bullish markets while also prudently limiting our risk and staying mindful of factors that could lead to market drops, all the while staying focused on helping our clients reach their long-term investment goals.
A Year in Review
Unlike many bull markets, the year’s upward move among most assets was not a “rising tide lifts all ships” environment within each asset class. Far from it. Instead, intra-asset returns were quite disparate, with some parts performing remarkably well and others performing poorly.
Within equity markets, large cap high-multiple growth stocks drove the lion’s share of gains, while small cap value stocks suffered, and in many cases finished down on the year. Looking across sectors, technology, communication, and consumer discretionary stocks were the best performers, while health care and energy stocks were among the worst. Finally, domestic stocks performed far better than international stocks on average, with many emerging markets like China faring among the worst.
Returns for other asset classes revealed similar “haves” and “have-nots.” Within fixed income, more aggressive investments like high yield bonds performed better than “safer” investments such as municipal bonds and mortgages.
The same bifurcation was true among commodities and hard assets. Gold and Bitcoin proved to be particularly strong performers, while oil and most other commodities were flattish to down on the year.
When intra-market returns deviate so much in a given year, one’s natural reaction is to expect a reversion to the mean in the following year. After all, if large caps trounced small caps one year – and the returns of each are roughly in line over the long run – then odds should favor the small caps going from laggards to leaders in the following year, right?
But here’s the trouble with that notion: markets can stay out of whack and not revert to the mean for far longer than seems possible. And betting against one part of the market simply because it outperformed in the previous year, is very often a losing trade.
In evidence of that, consider the following: the Year in Review above describes not only 2024, but ALSO 2023. In other words, if at the start of 2024, you avoided owning the biggest winners of 2023, you almost certainly ensured your portfolio would materially underperform in the coming year.
Let’s expand on that further by comparing the returns of two different parts of the US equity market: large cap growth stocks and small cap value stocks.
Heading into 2023, the 25-year average annual return for large cap growth stocks was just over 8.1% per year (using the S&P 500 Growth Index as our proxy and assuming reinvested dividends). Over the same period, small cap value stocks performed a bit better, producing just under 9.1% average annualized returns (using the S&P 600 Small Cap Value Index).
In 2023, large cap growth stocks gained 30.0%, more than doubling the performance of small cap value stocks. In 2024, the outperformance for large cap growth stocks was even greater, generating 36% returns versus small cap value stocks’ returns of only 7.5%.
Why this matters
I and the rest of the Investment Committee at SAM feel the information above is important to understand for two reasons. First, to acknowledge that the same, relatively narrow parts of the market that pushed broader asset prices higher in 2023 also led in 2024. And, as a result, these leaders have gotten exceptionally expensive. Gold and Bitcoin trade near all-time highs. The spread for high yield bonds over US Treasurys – that is, the level of increased yield that junk bonds provide Treasurys to compensate for their increased risk of default – is near an all-time low.
For equity markets, the stocks that have been carrying virtually all the water – the large cap growth stocks – trade at valuations rarely seen in the market. Specifically, per data from Bloomberg, the earnings multiple for the S&P 500 Growth Index is at a 50% premium to its 20-year average multiple, a level only seen about once every 25 years. Perhaps even more concerning, the ten largest companies now represent more than 36% of the S&P 500 Index weighting, a record level of concentration over the past century.
Second, while it may not be wrong to expect these high-flying parts of the market to underperform and mean-revert eventually, we do not want to be too early to completely abandon or bet against them. There are very good reasons why many of these assets are so coveted. Gold and Bitcoin are far superior long-term stores of value than perpetually debased fiat currencies. And many of the largest, best-performing stocks in the market also happen to be among the most innovative and profitable companies in the world, capable of growing their businesses at rapid rates even if we hit a slow patch in the broader economy.
Our Outlook and Positioning for 2025
So where does this leave us as we look ahead? While each of our investment strategies is different and has its own set of goals and parameters, the following are five key guidelines we’re using to optimize our positioning across all SAM accounts.
- There are lots of things to be worried about in the markets and world right now, so hold some extra dry powder. (But… don’t hide out only in cash.) We’ve already noted that many assets in the market are expensive, including the largest growth stocks. Add to that three concerns that are currently top of mind:
First, investor sentiment is very bullish and consensus expectations for future earnings growth are robust; we’d of course rather be investing when multiples, sentiment, and earnings expectations are far more muted.
Second, for equities to continue to power higher, the economy must stay strong. But the bottom one-third of income-earning Americans are already struggling, and it will be critical to see if the rest of the economy can lift them from the brink, or if they end up pulling us down with them. Add to this resurgent inflation that could ruin the economic party. We do not want the Fed raising rates in the near term, especially with the longer end of the yield curve already pushing up to 5%. Higher rates are a challenge for the economy and for stocks in the long run.
Third, heightened geopolitical concerns and potential black swan events call for more caution than normal. These include costly natural disasters like the fires in California and hurricanes on the East Coast. We know both have impacted many of your families as well as ours, and we hope and pray for their safety and well-being in the months and years of recovery to come. The concerns also include continued active war zones, social unrest, and verbalized aggression among large swaths of people and their leaders.
Across nearly all our strategies, given the concerns above, we want to have a higher-than-normal level of cash (and gold, and short-term US Treasurys). We want to be in a position to both shield part of our portfolio from undue drawdowns and to buy world-class assets at fire-sale prices if other investors panic or are forced to sell.
But, as we’ll explain below, this is not an environment to hide out only in cash.
- For the core of your portfolio, virtually all investors must own Productive Assets. In the current environment of massive government indebtedness and no political will to pay it down, we must take our financial well-being into our own hands more than ever before. Sitting solely in cash won’t work. That’s just a recipe for your purchasing power to be eroded over time.
Instead, you must own assets that will generate returns meaningfully above inflation. These will preserve the purchasing power of your nest egg and better protect your family’s financial well-being over the long run.
Our favorite type of productive asset is thankfully available for all investors to own. That is owning stakes in world-class businesses that are capable of growing earnings – and stock prices – at high rates for very long periods of time. Specifically, we are looking to fill our portfolios with durable, growing franchises that generate attractive profit margins and high returns on each dollar invested back in their businesses. We want businesses run by skilled leaders who own plenty of stock alongside us, who will make wise capital allocation decisions.
We of course want to own these businesses at attractive – or at least reasonable – valuations. This brings up two points we should address that further support our desire to own significant levels of productive assets across our strategies. First, we continue to find many securities that are attractively priced. We do own some businesses with seemingly “high” multiples that are more than justified by the swift pace and likelihood of their future growth. Perhaps more importantly, while the largest growth businesses trade rich relative to historical values, many areas of the market actually trade at a discount to long-term averages, including some world-class smaller and midsize businesses we own on your behalf.
Second, there are many reasons for optimism for the markets as we look ahead. Arguably the most important one is that despite most economists’ perennial fears, the U.S. economy is still solid. GDP growth remains robust even after accounting for inflation. Moreover, President Trump’s primary policy goals are decidedly pro-growth. His focus on reducing bureaucracy and taxes and on increasing government efficiency and private sector productivity only further support the economy and the market’s outlook for future growth. Finally, while not all spending will prove fruitful, enormous investments in artificial intelligence (AI) should be strongly positive for the US economy and stock market. The US is an outsized beneficiary not only of the increased investment levels but should also disproportionately gain from the productivity advancements that AI will almost certainly produce.
With that said…
- We want to prioritize favorable risk-adjusted returns in the current market. This is not an environment to stretch for outsized returns. To be certain, this is largely a continuation of the positioning we had for much of 2024. We want to generate solid growth and income for clients and do so with heightened levels of prudence.
This prudence has had the very positive impact of lowering volatility and drawdowns for your portfolios and your capital over time. With prices for many assets even higher, this continued focus on returns relative to the risk we’re taking is more important than ever.
One area where we’re finding particularly strong returns relative to risk is in private credit. To be sure, we at SAM are not alone in finding private credit attractive, as evidenced by the amount of capital that has flowed into the asset class over the past two years. I am not certain that all that capital will be allocated to solid risk-adjusted investments.
But I am more convinced than ever that SAM’s targeted approach to the asset class should lead to favorable outcomes for investors. I believe our focus on providing strategic, senior secured loans to profitable and durable businesses – and partnering with highly experienced lenders who concentrate on niche markets – will produce equity-like returns at a lot less risk.
We closed our first alternative investment fund focused on private credit in 2024. If you are an accredited investor with at least $1 million in investible net worth (outside your primary residence) and would like to learn more about other current or future opportunities to invest in private credit that may be available, please reach out to us and let us know.
- For at least part of our capital, we need to stay nimble. I know that this runs contrary to the advice of many investment advisers. “Set it and forget it,” they say. “Don’t try to time the market, because you’re more likely to miss powerful up days than avoid the downturns.”
We at SAM are sympathetic to these arguments. And as it relates to the core of your portfolio, we largely agree with them. Virtually all investors with a longer-term investment horizon should hold world-class businesses and other productive assets at the core of their portfolio to serve as a protector of their purchasing power over time.
We strongly disagree that you should think this way about all your capital. Investing is seasonal, and not every investment is suitable to own all the time. For instance, when interest rates are rising, you should not own long-term, fixed coupon bonds. Similarly, when a recession occurs, it’s prudent to reduce your exposure to cyclical and consumer discretionary businesses.
We believe that our ability to be tactical and stay nimble around the perimeter of our portfolios – while staying strategically invested at the core – will continue to be prudent and fruitful. While doing so may at times limit the gains in extreme risk-on environments, it should also lower portfolio volatility and lead to better outcomes in the long run.
- This final point is to make sure your investment plan is right for you. Life and circumstances can change. It’s important that you ensure that your investing game plan stays properly tailored to your unique financial situation, goals, investment time horizon, and tolerance for risk.
Markets go up and down, sometimes rapidly shifting directions. Recall just a few years ago how quickly 2021’s highest-flying winners became the biggest losers of 2022. If your primary goal is to protect the capital that you already have, you should largely avoid owning such volatile investments.
Our wealth management team is incredibly talented and well-versed at helping our clients align their investment positioning with their family’s long-term financial goals. If you plan to work with SAM, you can expect to work with a dedicated Wealth Manager that will conduct a full financial review for you. But whether you choose to work with us or not, we urge you not to skip this critical step.
Thank you for your continued interest. I hope you join us for our upcoming webinar!
Regards,
Austin Root
On behalf of the SAM Investment Committee