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One of the things you see around the New Year, and it seems to happen every year, is a group of analysts saying "This year is going to be a stock picker's market." I've never been able to figure out what this means. I think they mean that there might be a divergence in winners and losers in the coming year. But if this is the case, why not buy the index and own all the positions, because you don't want to risk picking the loser? If there is not a divergence in winners and losers, what's the point of picking anything? If they all do about the same, why not just own the index?
Picking stocks can be fun, and if you do it, I suggest you keep the amounts small and limit yourself to, say, 3 trades per year.
It's only January and I don't want to rain on the stock pickers' parade yet, because they’re probably already feeling a little grumpy with Dry January dragging on and all the online sites telling them how great they’re supposed to feel with that, but I feel compelled to. Let's look at an issue in picking stocks, specifically in a taxable account, that's not talked about a lot. That issue is private equity, and there is a lot of it in this era. Private equity folks prowl around the markets, looking for firms they can take private. Sometimes the companies they buy are in tough shape, and they need new management teams, the corporate jet fleet has to get sold, etc. But in other cases the private investors see a great company and they believe it is better than the markets appreciate.
So you and private equity agree, this firm rocks, let's ride it to the moon. Except then private equity embraces the adjective in their name, and they proceed to take the firm private. Your romance with them ends as you realize that not only do you not get your moonshot, you get a significant tax bill handed to you as you are forced to recognize your existing capital gains, giving your returns a haircut.
Ok, say you get lucky and the founder of the firm is still in control, and she listens to the "go private" pitch from private equity and says "No, actually I like being sued by endless plaintiffs' attorneys every time our stock drops a little. That's fun for me and I'm going to stay public." And the private equity guys get ushered out of the conference room dejected but they are all thinking "Wow that was pure steel" and they're all buying her shares for their personal accounts on their iPhones as they enter the elevator.
So the stock keeps running up, but the problem is all good things come to an end. Today, half of all of the companies that were in the S&P a decade ago are no longer in it (though this includes buyouts).1 Eventually the business and the stock plateau, and now, as a shareholder, you're kind of stuck. It's tough to get out of the position because of the taxable gain. But you don't really want to be in it either. Note that real estate and other asset purchases have the same problem.
Index funds are so good at saying "I told you so" that it almost gets annoying over time. But here again the index says "Guess what, using some fancy financial technology, we swapped that mediocre firm without creating a taxable gain and added in a new firm with better prospects." And then if done correctly, One Day In July can manage the rebalancing system among indexes without ever recognizing gains. This can get a bit tricky, but the objective is that both within and among the indexes, no recognized capital gains are created, even over long periods of time.
So in addition to protecting you from the "stall out problem" of an investment, the indexing strategy helps minimize taxes. Indexing should get a seat at the table, perhaps the head seat, in any tax planning strategy discussion.
~Dan Cunningham
1. Innosight Corporate Longevity Report. https://www.innosight.com/insight/creative-destruction/
"By the age of 40," author Elizabeth Gilbert once wrote, "everyone could write a memoir titled 'Not Exactly What I Had Planned.'" That pretty much sums up 2025 as an investment year. Almost from the start, the year turned into a black hole for adjectives. It twisted and turned, riding the back of a wild policy year, and with twelve days to go... generally has turned in a strong performance.
In a way, the endless information that spills forth from our screens is making investment decision-making more difficult. For example, you can say "Here is a thing I believe." You can then find something that matches that belief. The problem with the Internet is that the frictional barrier to finding "information" that backs up the belief is low. But the root problem, and this affects investors, scientists, and really all of us, is that you ask the question already edging toward the result that you want. To avoid falling prey to behavioral errors in investing, it is best to steer away from this natural tendency.
This can be difficult to do, though. For example, this year many people have thought "Wow, the world seems like it is at peak chaos." And I agree! I mean I don't think many people look back on 2025, kick their heels up with a bottle of port that they didn't quite finish off from the 2024 holidays, and think "Well, that went as planned." But who knows, really. Maybe we just see a lot more turbulence in the information age. Maybe when a saber-tooth tiger was hunting you on Christmas Eve 10,000 BC the part of the cave behind the fire pit seemed chaotic too.
One thing I do know is that you can't map what you want, at least in investing, onto a chaotic system. Markets, businesses, human behavior... it's all pretty volatile. It makes life frustrating and fun at the same time. But it won't fit a specific plan. That's just something you accept as an investor as you build tools and a strategy on top of that reality.
By being part of One Day In July, you trust all of us here with an important part of your life. We recognize that. We find that challenging and invigorating. That trust is an intangible that no contract can define, and no spreadsheet can quantify. All of us here thank you for it.
A good friend of mine who thinks he is in finance but actually is a philosopher recently told me, "There are always problems. The fun thing about the future is the problems to solve are new."
Onward to 2026.
~Dan Cunningham
You are probably seeing the news about private credit, alternatives, and private real estate. Now specially available in 401k plans as well!
But remember, liquidity is thy friend.
Finance firms perceive value when they can get someone's cash and lock it up without that person having the ability to give them a pesky call saying "I need my money back." They can, for example, buy an asset that looks like it has great returns but kind of ignore the leverage attached to it. They can write lots and lots of covenant default terms into the fine print, hoping to protect the investment with a pile of legalese.
There is a lot of interest in this! In New York, all kinds of complex deals are now possible when you restrict liquidity. Let's face it, if you are toiling on the desk of a large investment house, you might be a little jealous when you learn that your classmate from a fancy college, who did worse than you on the Chemistry 202 final, got a job at a Silicon Valley venture capital firm and she has her investors locked in, with plenty of time to make decisions. To make matters worse, she is now ahead of you on the national leaderboard of Brawl Stars, and keeps texting you about it at work while you try to deal with client fund redemptions. This all seems unfair.
And your venture capitalist classmate doesn't have a market reporting on what her investments are worth every fifty milliseconds. So if things go badly, she has time to paper it over, kind of smooth out the returns curve, maybe have lunch with the auditor who determines the value of the private investment. Remind said auditor how much she loves the independence of the audit, oh and also the auditing fees charged are high but remember she hasn't negotiated them down.
So back in New York, this seems like a good idea and you mimic the principles with a private credit fund. You can package all kinds of fees that are hard to see into the investment, you have lots of time to deal with portfolio, you don't have a market reporting on you, and if investors want their money back, you can tell them sorry, they should have read the fine print.
But on the other side of the coin, the investor has given up a lot. It is common that clients need liquidity, and we get it for them, generally within 48 hours. Sometimes the time is not as short, but an asset shift is warranted, and we need to be able to make it.
If you give up the right to liquidity, you should get paid a substantial amount in exchange. This includes CDs from banks, which lock up capital, generally with only minimal extra compensation.
However, Cliff Asness at AQR Capital Management notes that too much liquidity can be a negative to the investor.1 John Bogle, the founder of Vanguard, did not like ETFs because they tempted the investor to trade too much.
This dichotomy is something we think about a lot, and at One Day In July, we take seriously our role as advisors to preserve near-perfect liquidity for you, while creating some barrier to friction-free trading.
~ Dan Cunningham
1. Cliff Asness at AQR notes this:
"I mean, let’s get real, does anyone seriously doubt that at least part of the attraction of private equity, and its wildly growing popularity, is an increasing acceptance among investors that they will have to get very aggressive to reach their goals (e.g., underfunded pension plans and the like), but still possess an absolute aversion to living under the true reported volatility this aggression entails?"
This was from 2019, but still relevant today. Read more here.
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