by David Young, President
A Tale of Two Markets
2024 could be described as either the best of times or the worst of times, depending on how you were invested. With a volatile presidential election, persistent inflation, and significant geopolitical conflicts, it was a year marked by extremes and challenges.
The S&P 500’s strong performance was mainly driven by a small group of mega-cap technology companies, often called the “Magnificent Seven”: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla. Together, these companies contributed 57% of the index’s total returns. Remarkably, just 1.4% of the companies in the S&P 500 accounted for over half of its gains. This concentration level underscores a growing risk: the market’s heavy dependence on a few high-performing stocks raises questions about the sustainability of returns.
By contrast, the S&P 500 Equal Weight Index, which allocates an equal weight to each stock, delivered a total return of approximately 13.01%—only about half of the 25.02% return achieved by the capitalization-weighted S&P 500. This disparity highlights the outsized influence of mega-cap technology stocks on the overall market.
Earlier in the year, Barron’s optimistically proclaimed, “Move Over, Magnificent Seven Stocks. The Other 493 Are Set to Take Off.” However, that prediction did not materialize. The Magnificent Seven continued to dominate the market throughout 2024, with individual stock returns far exceeding the index average. Nvidia and Tesla, for example, posted triple-digit percentage gains, further emphasizing their significant role in shaping market performance.
The sharp divergence between the capitalization-weighted and equal-weighted indices illustrates the critical role of the Magnificent Seven in driving the S&P Index returns. Without their extraordinary contributions, the broader index’s gains would have been far more modest.
Paragon’s Investing Process
In volatile markets, reflecting on history provides valuable insights. At Paragon, we’ve managed money for 38 years, but since 1998, in the past 27 years, we have published our annual track record. Our long-term performance in the face of market volatility is a testament to the strength of our strategy.
Market progress often involves taking two steps forward and one step back. Over the past 27 years, we outperformed the S&P 500 for only 12 years, while the index outperformed us for 15 years.
At first glance, this may not seem impressive. However, the cumulative returns tell a different story: 1,608% for Top Flight versus 894% for the S&P 500. This performance underscores an essential point: consistent, disciplined investing delivers exceptional long-term results, even with occasional underperformance. (See performance Disclosures on page 7.)
Why Does This Happen?
Our Top Flight portfolio comprises approximately 44 stocks, balancing diversification and targeted exposure. However, in years like 2024, this balanced approach can work against us. While we held several top-performing stocks, we didn’t have the same heavy concentration in them as the capitalization-weighted S&P 500.
In 2024, the only way to match or surpass the index was by either replicating it entirely or heavily concentrating on the few stocks driving its outperformance. In contrast, our diversified strategy is purposefully structured to balance risk management with long-term growth.
Other years tell a different story. For instance, in 2020, our Fast Movers strategy, a key component of Top Flight, returned 138%. While extraordinary years like 2020 are rare, they demonstrate the value of a disciplined approach. Over time, this discipline has enabled us to outperform the S&P 500, one of the most challenging benchmarks.
Risk-Adjusted Returns
Superior returns are only part of the equation; prudent risk management is equally important. At Paragon, we use metrics like the Ulcer Index, which measures downside risk, to evaluate performance. Over the past 27 years:
Top Flight’s Ulcer Index: 10.68
S&P 500’s Ulcer Index: 15.66
NASDAQ’s Ulcer Index: 37.61
A lower Ulcer Index reflects better risk management. These figures demonstrate that while delivering superior returns, Top Flight has more effectively minimized downside risk than the S&P 500 and NASDAQ.
Our long-term success is a testament to the value of disciplined investing, careful risk management, and the ability to navigate various market conditions. This should instill confidence in our clients and potential investors.
Where Do We Go From Here?
A recent AP headline observed, “Wall Street parties like it’s 1998 as AI fuels gains unmatched since the dot-com era.” This comparison reminds us of the risks associated with markets dominated by a few high-performing stocks. The late 1990s, like today, were marked by extreme concentration, with most returns driven by a narrow group of companies.
Before the dot-com bubble burst in 2000, value-oriented stocks significantly underperformed, causing many managers to abandon their strategies. This year, our portfolio has leaned toward value because these stocks currently offer the most reasonable opportunities based on valuations.
When the dot-com bubble burst, our models rotated into small-cap value stocks, shielding us from the 2000–2003 crash. This experience highlights the importance of adaptability and maintaining a disciplined approach in uncertain markets. While no one can predict the future, history teaches us that maintaining perspective and discipline is critical during periods of market exuberance.
Stay the Course: The Power of Long-Term Investing
Investing for the long term is a journey, not a sprint. Staying true to your strategy requires vision, patience, and discipline—even when the road gets bumpy.
History has shown that those who focus on the big picture and remain committed to their strategy are often rewarded with exceptional results. While there will inevitably be periods of underperformance, these moments test an investor’s resolve and define long-term success.
Outstanding performance doesn’t come from avoiding volatility but from enduring it. You benefit from the compounding effects of time, market growth, and your well-designed strategy by staying invested.
So, stay the course, trust your process, and remember that the journey may have ups and downs, but the destination is worth it. Commitment to your long-term strategy is key to successful investing.
Closing Thoughts
The Paragon approach, which emphasizes discipline, risk management, and a long-term perspective, has been a cornerstone of our success. While no strategy is immune to market volatility, our 27-year track record demonstrates the power of consistency and adaptability. This approach sets us apart and guides us in navigating the ever-changing market landscape.
History often serves as both a guide and a cautionary tale. While we cannot predict the future, we can learn from the past. By maintaining a disciplined approach and emphasizing diversification, we aim to help you confidently navigate the risks and opportunities of today’s market environment.
Don’t hesitate to contact us if you have any questions or concerns about your investment strategy or anything else.