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  • Ben TeSelle

Dorato News, January 2022

Portfolio Issues - Expectations


If we told you to expect a 5% return on stocks next year, and the return was in fact 5%, you’d probably be reasonably happy. But if we told you to expect a 20% return, and the actual return was 5%, you’d probably be disappointed, maybe even miffed.

Nobody wants you to be miffed, particularly us. Of course, we could always aim low, so that you’ll always be pleasantly surprised; but you might see through that ruse.

We bring this up because we’re about to tell you to temper your expectations for future returns.


You may think we’re aiming low, but we don't think so.

We’ve just had more than a decade of 14% average annual returns. The long-term average for stocks is 10%. Even though we’ve had longer periods of above-average returns in the past, we think the conditions today are different.

Historic returns are not the only factor we consider. We also look at prices relative to current cash flow and earnings, and relative to future earnings. All these metrics are on the high side of history. We also consider the amount of debt in the US and throughout the world. All indicators point to more subdued returns over the next five years or so.

In 2000, after we’d had two decades of 18% average annual returns (source: WealthMeta), people thought they were being conservative by estimating future returns of 12-14%. The actual average annual return for US stocks over the next decade? Zero percent.

Don’t set your expectations too high. It’s no fun to be miffed.



“Look, don’t be disappointed. I never said I was the world’s largest fish. That was the marketing department.”


Market View - Change is in the Air

Investors continue to believe in the big technology stocks the way little kids believe in Santa. Technology stocks now take the top seven spots in the S&P 500 index (eight if you separate Alphabet into its two classes of shares). Those big companies comprise about 25% of the index, and the technology sector accounts for nearly 40% of the total index. That’s mighty close to the 42% weighting it had in early 2000, before technology and telecommunications stocks took a big tumble. We should note that we include Meta (Facebook), Alphabet (Google), and Amazon as technology stocks. Other analysts might not, but we think they belong in that category. On its face, this continued belief in big technology stocks would seem to indicate no change in the investing environment we’ve had over the last several years.

Yet change is in the air. The fast-growing but profitless companies whose stock prices have soared over the last five or so years have experienced a change of fortune. Those stock prices have fallen 40-50% in the last several months. We think it’s about time, and that this trend has farther to go, as the speculative craziness of the last several years still has some froth in it. We think some of that froth spilled over into the big technology stocks, and that’s why we continue to advise caution for those stocks.

We’ve noticed that Real Estate Investment Trusts (REITs) seem to be getting a lot of attention as 2022 investments. This could be due to strong performance in 2021, or it could be due to the high inflation figures of the last several months. When people hear inflation, the conditioned response is to buy real estate. Our view is that REITs are already fairly expensive, and anyone piling into them now is likely to be disappointed.

The bond market is also reacting to inflation, but maybe not quite in the way that we expected. If investors are worried about inflation, you would expect long–term US Treasury rates to rise. In fact, they’re slightly down, to about a 1.5% annual rate. Either the Federal Reserve’s continued bond buying is keeping rates low, or investors think inflation won’t last and the economy will slow. Since the Federal Reserve says they will stop buying bonds over the next six months, we suppose we’ll see pretty soon what sort of effect that has. Our guess is that we’re not in for a period of raging inflation, but it might be a bit higher than what’s currently priced into the market.

For both stocks and bonds, China is likely to be a source of volatility rather than a source of economic strength. They have all the ingredients for a property/banking/debt crisis that would match our own in 2008-2009. How the Chinese government responds to that crisis will determine its severity. Because China’s economy is nearly as large as the US’s, what happens in China will matter to all of us.

Cryptocurrencies are as nutty as ever. To call them currencies is a misnomer. Many of the people who tout these tokens don’t know what currency is. There is, however, great value in the underlying concept of blockchain. So the key will be to look for companies that can use the blockchain technology to cut costs or create new lines of business, in much the same way that companies figured out how to use the internet over the last twenty years.

This is the time of year when the financial news is full of predictions, and full of advice about adding or discarding some stock or investment. Most of it is not helpful. Why? Because none of those folks knows your particular situation. A good idea for one person might be a horrible idea for the next person.

So, as always, stick with your long-term stock and bond allocation. Change might be coming for the big technology stocks, but it’s probably not coming for your stock/bond allocation.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab

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