The Tortoise and the Hare in the Investing Race | Denewiler Capital

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The Tortoise and the Hare in the Investing Race

Written by Greg Denewiler, CFA® // July 25, 2023

Who hasn’t heard the children’s story of the race between the Tortoise and the Hare? The story is originally from the collection of Aesop fable’s, written by a Greek slave who lived around 600 BC. It is about the virtues of a slow and steady approach and is a timeless lesson. For those of you who have not been in elementary school recently, the story begins with the hare laughing at the tortoise, and shortly after the race begins the hare leaves the tortoise far behind. With such a healthy lead, the hare becomes complacent and decides to nap before the race is over, while the tortoise just continues to slowly move along, eventually winning the race. You may be thinking: What does this story have to do with the market? With the latest divergence between big tech and the market, it may feel like a race between a rabbit and a tortoise. You may even feel like big tech has left you far behind.



You can probably guess who the hares are – Apple, Microsoft, Amazon, and Nvidia. Just these four companies make up 20% of the S&P 500 (SPX) index and they have been increasing in price like scared rabbits running for their lives. Since the S&P 500 is a market capitalization-weighted index, the largest companies have the most influence on the index’s performance. The two largest members, Apple and Microsoft are up 49% and 45% respectively YTD. Just those two represent 15% of the S&P 500 SPX by themselves. The tortoise is the equal-weighted S&P 500 (RSP) index. Here, each of the same 500 companies only accounts for 0.25% of the total weighting, therefore a few big winners or top-performing sectors are not going to dramatically skew the index’s return. Everyone hears about the S&P 500 capitalization-weighted index because it is the official index, however, the S&P 500 equal-weight index is a better benchmark to see how the broader market is doing. The challenge is when you look at your own portfolio, if 20% of your account is not in Apple, Microsoft, Amazon, and Nvidia, your portfolio is not going to perform nearly as well. You might be thinking: Why not just invest 20% of my money in the four big ones? Well, because last year Apple was down 26%, Microsoft was down 28%, Amazon declined by 49%, and Nvidia was down by 50%. Because of capitalization-weighting the SPX declined 18%, while the equal-weight RSP was only down 11%. If you owned a dividend-based index in 2022 you were likely only down 6% or less. If we look at the longer race between our hare and tortoise, the winners change.



The race so far this year is easily won by the S&P 500 SPX (hare), it is up 20% versus 10% for the equal-weighted RSP (tortoise) index. Take the distance out to three years and the tortoise leads 53% to 48%. For 10 years the hare is ahead 225% to 180%. When we consider the marathon distance of 20 years, the tortoise wins 730% to the hare’s 650%. If you use the same 20-year performance period, but end it in December 2022, the tortoise must have been running scared because he was ahead of the hare by 650% versus 535%. The media and the investment industry change time periods all the time to make the numbers fit their narrative, so be cautious regarding performance claims. This is something to keep in mind because the winner may depend on which period you choose, and that becomes significant. Who would have thought a children’s story was so relevant in 2023?



When you invest, the market will try to convince you that you are wrong sooner or later. If you are not resolute in your investment strategy, the market will convince you to either stop running or switch horses (we are equal animal employers), and that usually never works out. Investment styles ebb and flow, sometimes by a lot. Our tortoise and hare illustration shows that the longer-term race is what matters. A 100-yard sprinter and a marathon runner approach their races completely differently. Have you ever seen a marathon runner check their times every 100 yards? They watch their pace, but the last thing they are concerned about is if their time is close to a 100-yard sprint time.



This simple Aesop fable from more than 2000 years ago still has a valuable lesson embedded in it today. As markets become ever more driven by headlines and information that is available in milliseconds, it is quite likely that investors don’t even realize who is leading the race longer-term. There is no right or wrong race to run, just know which race you are in.


Observations On The Market No.385