Markets Don't Always Go Up, But Good Investments Eventually Will

The passive investing revolution has transformed financial markets over the last decade, but at what cost? In this thought-provoking conversation, portfolio manager Seth Cogswell challenges conventional wisdom and examines the hidden risks lurking beneath the surface of today's market structure.

When everyone piles into the same stocks through index funds, it creates a self-reinforcing cycle that rewards size rather than quality. As Seth explains, "Passive will be perpetually overweight overvalued companies and perpetually underweight undervalued companies." This market distortion has allowed mega-cap names to dominate returns while leaving potential opportunities in mid-size companies largely ignored.

We explore why diversification means more than simply owning different stocks – it requires investments driven by fundamentally different forces. For retirees, this distinction becomes particularly crucial when considering sequence-of-returns risk, a danger often glossed over in the passive investing narrative that emphasizes returns while minimizing discussion of risks.

The conversation takes a fascinating turn when examining mid-cap companies, which Seth describes as the market's sweet spot: established enough to provide safety, yet small enough that additional growth can significantly move the needle. These businesses often lack the excitement factor that drives passive flows but may offer compelling value for discerning investors willing to look where others aren't.

Perhaps most concerning is how the passive revolution might be reshaping capitalism itself. With unprecedented low interest rates, mega-corporations have enjoyed advantages that smaller, innovative companies cannot access, potentially stifling the entrepreneurial spirit that has historically driven American prosperity.

Whether you're rethinking your portfolio allocation or simply curious about market dynamics, this episode offers valuable perspective on finding opportunity while others chase momentum. As events in financial markets continue to unfold, these insights may prove increasingly relevant for navigating whatever comes next.

Timestamps:
[00:00:00] Intro
[00:07:17] Deep Value vs Diversity of Thought
[00:14:31] From Trader to Portfolio Manager
[00:24:02] The Passive Investing Phenomenon
[00:35:23] Risk Management in Retirement
[00:48:22] Finding Value in Mid-Cap Companies
[01:00:15] Making Thoughtful Investment Decisions

DISCLAIMER:
Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy, and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the options presented. Encompass More Asset Management LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.