Trading Desk: A Lot Of Stocks Are Still Making Money

Once again, the big market benchmarks have hit a wall as the bulls struggle to do more than balance out all the lingering dread. But even a child can see that enough stocks are soaring right now to make stocks a pretty good place to keep your cash.

Start with the biggest picture of all. The Wilshire 5000 has generated about $2.5 trillion for shareholders across the past 12 months. That’s actually a lousy result, barely weighing in at a 6.2% annualized return, but guess what?

It beats the interest you would’ve gotten on government bonds. It beats every CD and bank product on the market. And it’s even tracking a percentage point above trailing inflation.

If you had money in “the market,” and the Wilshire aims to provide weighted exposure to every U.S. stock that matters, you made money over the past lousy 12 months, even after taking out inflation’s bite. Easy. And in a good year, the market usually does at least 2-4 percentage points better.

But there’s a lot of obvious trash on the market. Six out of ten stocks have lost ground over that period and the median loser is down about 30%. That’s grim.

You can’t screen out every loser without essentially stepping away from the market altogether. Every portfolio takes some swings at pitches that don’t go anywhere. I think about venture capital funds that are essentially geared around knowing in advance that 30% of the best ideas will fail over time.

They just don’t know which ones. They count on the rest of their bets doing well enough to balance the zeroes and give their extremely demanding clients what they need to beat the market.

And every economic cycle has its pockets of weakness . . . as I say, there’s always a recession somewhere. But that means there’s almost always a relative boom playing out as well.

Sometimes you just can’t see it. Until recently, the only thing on Wall Street that was really working was energy, which still only accounts for less than 5% of the S&P 500. If you had a lot of Exxon (XOM) you were feeling good. But with a full-spectrum index fund, it was hard for those scattered oil stocks to pierce the overall gloom.

That’s where the overall market still is. Out of the 40% of stocks that are up in since last May, the median gain is only 23%. On paper, the bears are still in control: more stocks moving down a greater distance, fewer stocks moving up a little bit less.

What’s happened, however, is that many of the biggest companies are doing fine. Apple (AAPL) and Microsoft (MSFT) aren’t up much more than the average winner of the past year, but they’re big enough and doing well enough that by my math they’ve generated about $1 trillion of the overall wealth created on the Wilshire.

But then when you start to drill down, you start finding truly transformational outcomes. Eli Lilly (LLY) is up close to 50% in the past year. Boring old Oracle (ORCL) is keeping pace. And Netflix (NFLX), once left for dead, has doubled.

We can settle for the big stocks and their sedate, almost battleship-like trajectories. Or we can open ourselves up to these scattered high-impact names, which is what those venture capital funds do.

They’re not looking for “average” returns. They’re looking for companies that can soar hundreds of percentage points, enough to triple the value of the entire portfolio in a decade.

Stocks like that exist even in these market conditions. Most are tiny until they get their big breakout moment.  I’m a little embarrassed to say we own a precious few in the IPO Edge portfolio right now.

When you’re weighting by size, these little flares are barely visible against the shadow of an AAPL or a MSFT. So I suggest skipping the weights and simply treating these little companies with the same respect as you give the giants of today . . . the giants you’re hoping they’ll grow into tomorrow.