“Long tails [highly unlikely, perhaps unexpected events] drive everything. They dominate business, investing, sports, politics, products, careers, everything. Rule of thumb: Anything that is huge, profitable, famous, or influential is the result of a tail event.”
Morgan Housel
This is my 11th annual letter since Laurus began serving clients and my 5th since the COVID disruption.
COVID-19 turned the investment world into a bizarre episode of “Survivor”, where instead of racing to set up face-to-face meetings with investors, fund managers scrambled to understand a Zoom login. Overnight, financial hubs from Wall Street to Canary Wharf transformed into battlegrounds for the best home-office setups. Suits and ties were replaced with hoodies and pajama bottoms, and Bloomberg terminals competed for bandwidth with kids’ online classes and Netflix marathons. Investors, once jet-setting dealmakers, found themselves trying to close deals while their toddler demanded another peanut butter sandwich in the background.
Meanwhile, the markets decided to take their own pandemic rollercoaster ride. One day, everyone was convinced we were heading into the next Great Depression; the next, meme stocks were skyrocketing as if Reddit held the cure for economic instability. Financial advisors had to explain to bewildered clients why their retirement portfolio lagged behind the returns of a company that specializes in dogecoin mining or virtual real estate. COVID didn’t just disrupt the markets—it handed the investment industry a crash course in flexibility, creativity, and the very real risk of unmuted Zoom gaffes.
On a more serious note, COVID was not the only disruptor in the investment world.
Over the past decade, the world of public investing has become increasingly characterized by an “index mindset.” This acceleration comes from the success of index investing, whereby investors eschew active management of their portfolios to own an entire index of stocks, thereby providing a mechanism for decent returns while (mostly) not losing big.
Once upon a time, investment professionals were the rock stars of finance, dazzling clients with charts, graphs, and cryptic acronyms.
But then came the index funds – unassuming, low-cost, and unapologetically boring. These financial minimalists didn’t promise to beat the market; they just wanted to be the market. And like a low-budget indie film that somehow sweeps the Oscars, they took over. Now, fund managers who once spent hours poring over earnings reports find themselves explaining to clients why their net returns haven’t outpaced a portfolio that costs less than a Netflix subscription.
The rise of index funds has brought a peculiar kind of existential crisis to active managers. Imagine spending years mastering the art of stock picking, only to be outperformed by a portfolio that’s essentially a financial “greatest hits” album. It’s like training to be a gourmet chef, only to lose customers to a food truck serving PB&J. At cocktail parties, fund managers now dodge questions about their “alpha” the way actors avoid talking about flop movies. Meanwhile, index fund investors smugly sip their wine, silently reveling in the knowledge that their portfolio’s “strategy” involves little more than doing absolutely nothing.
The index mindset is like the kid in class who always plays it safe – coloring inside the lines, avoiding drama, and keeping their hand down when the teacher asks for volunteers. It’s all about following the evidence and thinking probabilistically. It’s less about bold moves and more about blending in with the crowd. Think “average is awesome!” instead of “shoot for the stars!” It values quantity over quality, efficiency over exploration, and mistake avoidance over daring decisions. If it had a motto, it would probably be, “Why make a splash when you can just tread water?”
This mindset is less about ambition and more about risk mitigation, like wrapping yourself in bubble wrap before going out for a jog. It’s about scale, cost efficiency, and slow, steady evolution. Case in point: about a third of all S&P 500 trades now happen in the final ten minutes of trading (thanks, Bloomberg), a 22% jump since 2021 (thanks, CIBC World Markets).
Active managers, meanwhile, are often stuck playing defense, focusing on downside protection while the markets party on without them. And let’s be honest, in a world where the markets have been on a tear for the past decade or so, it’s no surprise more investors are opting for the set-it-and-forget-it approach of index funds. Why pay for the gourmet meal when a simple buffet keeps serving up gains?
Why? Because markets aren’t static – companies rise, fall, and sometimes implode spectacularly. Index funds are beholden to the market’s ebb and flow, stuck holding the winners and losers in equal measure until the market decides otherwise. Active managers, however, have the flexibility to dodge sinking ships and ride the winners more aggressively. They aren’t tethered to a list of stocks just because they’re part of an index; they’re free to pivot, adjust, and, most importantly, think ahead.
Over the long haul, active management shines brightest in less efficient markets—think small-cap stocks, emerging markets, or sectors undergoing dramatic change. Here, information asymmetry and mispricing create opportunity that a passive strategy simply can’t exploit. While an index fund might buy every tech company in a bubble, an astute active manager can discern between a fleeting fad and a genuine innovation, positioning themselves accordingly for long-term gains.
Despite the enthusiasm for index investment, one should not summarily dismiss active management – particularly in less efficient markets.
Public markets used to be the life of the party—stock tickers flashing, IPOs popping, and analysts yelling over each other about the latest earnings beat. But now, private markets have sauntered in like the effortlessly cool kid who doesn’t even try to impress. Venture capitalists, private equity wizards, and unicorn startups are sipping oat milk lattes while discussing billion-dollar valuations in industries you didn’t even know existed. It’s like the prom king suddenly got overshadowed by the mysterious new transfer student with a startup that “disrupts paperclips.”
Private markets have introduced a vibe where exclusivity and buzz trump transparency and quarterly earnings calls. Who needs the tedious back-and-forth of shareholder meetings when you can raise a Series D round at a valuation that makes public market analysts choke on their spreadsheets? And while public markets are busy debating the impact of inflation, private markets are out here creating the next app that lets you order coffee with a single blink. The FOMO (fear of missing out) is palpable, and many public market investors moved to join the private club—assuming they can crack the secret handshake, of course.
After the Global Financial Crisis, central banks basically turned the bond market into a snooze-fest as near-zero interest rates made traditional fixed income as exciting as watching paint dry. Enter private credit, the riskier but more rewarding cousin of public bonds, offering yields high enough to make pension funds and insurers nod in approval. But as Larry Fink (Blackrock CEO) has warned, private credit is not without its skeletons. With looser regulations, opaque disclosures, and a greater chance of default during downturns, it’s less “sleep easy” and more “read the fine print twice.”
Private equity has also stolen the spotlight from public equities, especially for institutions with long-term liabilities. Pension funds and endowments, unbothered by the need for liquidity, have embraced the illiquidity premium like it’s the hottest ticket in town. The strategy? Buy in, lock up, and wait for those operational improvements to pay off. Of course, this comes with its own challenges: high fees, heavy leverage, and vulnerability to rising interest rates. But let’s not forget how Howard Marks’ put it – “The biggest risk in private markets is not knowing what you’ve got until it’s too late.” With valuations sometimes as murky as a startup’s mission statement, investors might not know whether they’re sitting on a gold mine or a ticking time bomb.
And then there are the “secondaries,” the private market equivalent of a used car lot, where existing investors sell off stakes to newcomers. These can provide liquidity, but with valuation clarity as elusive as a unicorn’s footprint, it’s not exactly a foolproof solution. For institutional investors, these risks are manageable thanks to long-term liability structures. But retail investors? They’re venturing into this space without the safety nets institutions enjoy, chasing returns in an environment where liquidity, transparency, and complexity are constant question marks. The possible result? A private market bubble that could be a retail investor’s Achilles’ heel.
While private markets undoubtedly offer opportunities, their risks are not for the faint of heart—or the short of patience. Institutions may be equipped to navigate these waters, but for retail investors, the temptation to join the private market party might just come with the financial hangover of a lifetime.
The past year has been a rollercoaster for investors, with public and private markets competing to see who could be more chaotic. Higher interest rates have upended the easy-money days, leaving traditional business models scrambling to adapt. Savers, long relegated to low-yield purgatory, are now rediscovering the charm of money market funds, which suddenly seem like the cool kids of fixed income. Whether this newfound affection translates into a bond market resurgence is still up in the air – but let’s just say the flow of funds is looking less like a trickle and more like a river.
Meanwhile, artificial intelligence has become the financial world’s favorite buzzword—because nothing says “future-proof strategy” like throwing “AI” into every earnings call. The tech industry, always hungry for the next shiny object, is in the midst of an AI arms race led by mega-cap titans and powered by chipmakers. AI’s immediate impact on software—like automating text analysis, translation, and summarization—might seem small, but it’s the potential for entirely new applications that has investors dreaming big. Of course, predicting AI’s trajectory is a bit like trying to guess the next meme stock … good luck with that.
Geopolitics has also barged into the investment conversation with all the subtlety of a Fed rate hike. Wars in Ukraine and the Middle East, combined with rising U.S.- China tensions, are injecting volatility into both emerging and developed markets. The pivot from economic efficiency to national security is reshaping supply chains through onshoring, nearshoring, and the wonderfully coined “friendshoring.” Mexico, for instance, now outpaces China as the top exporter to the U.S., proving that proximity – and political camaraderie – matters. But don’t expect these trends to come cheap; lower growth and stickier inflation could be the likely side effects.
And then there’s AI again—the wildcard in all this disruption. It’s not new, but its sudden stardom has everyone wondering just how much it will reshape industries, including investing itself. We already see AI scanning and extracting data faster than a caffeine-fueled analyst on a deadline, but its true potential remains a giant question mark. The irony? While AI aims to make predictions smarter and faster, it hasn’t figured out how to predict its own impact.
All this is, of course, conjecture from a simple stock analyst. I don’t profess to have any “macro” skillset and, as you know from reading many of my past writings, I don’t believe we can accurately predict anything in the future. And I certainly hope I’ve not offended any readers with attempts at humour.
As the year wound down, I’ve been often asked how the markets will perform next year. My go-to response borrows from a good friend who brilliantly summarizes market forecasting: “Based on historical data, we can confidently say the market will likely deliver somewhere between a 33% loss and a 50% gain – with a 1-in-20 chance of it doing something completely ridiculous outside that range.” Which is a nice way of saying, it’s anyone’s guess.
What I truly am certain of is the incredible quality of our team. While the past year has, once again, been a difficult one, their persistent diligence at overcoming obstacles alongside their continued kindness, support, patience, and good counsel leads me to believe our success is inevitable.
And, of course, our continued thanks to those who have entrusted us with their investment assets. We truly appreciate your continued support, your confidence in our abilities and, dare I say it, friendship.
Personally, I remain forever grateful and, speaking on behalf of everyone at Laurus, we truly hope to exceed your expectations.
I will once again conclude this year’s letter with my fondest wish, echoed by everyone here at Laurus, that you have the courage, faith, and strength of spirit to walk the difficult road ahead, along with the tenacity and patience to achieve everything you desire.
Christopher (Chris) Page