Viewpoints
Charlie Munger, Warren Buffett’s legendary right-hand man, was renowned for his wit, wisdom, and insightful parables. Among our favorites is a story he often shared:
A teacher in Texas asked her class a seemingly simple arithmetic question: “If there are nine sheep in a pen and one jumps out, how many sheep are left?” Every student answered correctly—except one little boy, who confidently declared, “None of them are left.”
Confused, the teacher replied, “You don’t understand arithmetic.”
“No, teacher,” the boy responded firmly, “You don’t understand sheep.”
This anecdote perfectly illustrates a fundamental truth of investing: true success isn’t achieved by blindly following the herd. Instead, it requires thoughtful analysis, informed decision-making, and the courage to chart one’s own path—even when that path diverges sharply from popular opinion.
Over the past few years, maintaining a defensive stance has been decidedly unpopular, particularly as enthusiasm drove mega-cap technology stocks into bubble territory. Recently, however, market behavior has begun to validate this cautious approach, as investors pivot sharply away from trendy, AI-driven names toward consumer staples and other defensive sectors. Simultaneously, intriguing opportunities are emerging in Japan, as this long-dormant economic powerhouse appears to finally awaken after decades of stagnation.
Lastly, we’ll address early concerns about the current Trump administration and explore how its initial actions could shape market dynamics moving forward.
The Great (and Predictable) Rotation
Examining the top five publicly traded companies decade-by-decade from 1990 to today (Chart 1) reveals a striking pattern: there are virtually no repeats. Expanding the list to the top ten underscores this trend even further, with only Apple, Microsoft, and Exxon appearing more than once. This observation highlights a crucial investment insight—recency bias often distorts perceptions of market dynamics, causing investors to overlook how swiftly market leadership can shift. The recent dominance of mega-cap technology stocks may feel permanent, yet history consistently demonstrates otherwise. When sentiment inevitably changes, investors quickly pivot to safety, triggering significant rotations toward defensive sectors. As current market turbulence reminds us, no sector maintains indefinite supremacy, and prudence is always rewarded over the long term. With the Magnificent 7 stocks down over 15% year-to-date, Chart 2 clearly illustrates how capital flows have shifted in response, bringing renewed investor attention back to defensive sectors such as Healthcare and Utilities as markets recalibrate toward safety. A recent Wall Street Journal article highlighted this trend: “Rattled by the threat of trade restrictions and a slowing economy, investors are turning to a classic defensive play: dividend stocks” (March 10, 2025, “Wary Investors Play Defense In Switch to Dividend Stocks”). Investor appetite for volatility has evaporated, driven by several factors: rising recession risks, trade uncertainties, broader economic concerns, and perhaps most critically—downward earnings revisions from companies. As a result, dividend-paying stocks have emerged as the clear beneficiaries, while volatile tech names have borne the brunt of the shift.
The Rising Sun: A Sleeping Giant Awakens, Enters Our Strategic Asset Allocation
Longtime clients of SG & Co. know we’ve closely followed Japanese markets for decades—dating back even before Mitsubishi famously purchased Rockefeller Center, only to sell it back to David Rockefeller for pennies on the dollar just four years later, after Japan’s asset bubble spectacularly burst in the early ’90s. This collapse triggered a prolonged deflationary era that, despite continuous central bank stimulus, at times seemed inescapable. However, when Shinzo Abe returned to power in 2012, he introduced the ambitious Abenomics initiative—an economic revitalization strategy that is finally bearing fruit, creating compelling new opportunities for international investors.
Three Tailwinds Driving Japanese Markets Higher
Japan’s revival is driven by three key factors: First, Japan has finally exited deflation. After decades of sluggish growth, new policy efforts combined with Covid-induced inflation have pushed the economy toward sustainable price stability. Rising wages—a key factor in breaking deflation—have accelerated, with nominal wages up 4.8% year-over-year in December 2024, the fastest pace since 1997. In response, the Bank of Japan raised interest rates by 1/2 percent in January. While real GDP growth remains modest, Japanese companies have delivered impressive EPS growth, outpacing the broader economy—a stark contrast to the U.S.
Second, corporate reforms have reached a tipping point. Japanese corporate managers have long faced pressure to improve returns on capital, but governance reforms have gained serious momentum. Public companies are increasingly prioritizing higher ROEs and shareholder returns, evidenced by a 75% surge in share buybacks in 2024.
Third, Japanese equities provide a strong margin of safety with attractive valuations and solid fundamentals. Equities remain inexpensive, supported by rock-solid balance sheets and diversified export markets. Many companies have offshored production from China, strengthening Japan’s competitive position and domestic demand. Despite lingering skepticism, Japanese stocks have delivered strong local returns, with value stocks particularly compelling, trading at historically deep discounts. Additionally, with the yen undervalued, unhedged investors could benefit from long-term currency appreciation.
Trump, Tariffs, DOGE, And The Market
The first few months of the second Trump administration have been predictably chaotic. The national debt remains a pressing issue, with the administration attempting to address it through the DOGE initiative. Although early results remain mixed, we’re simply relieved to see the national debt prominently featured in public discourse before it escalates into a full-blown crisis.
Meanwhile, uncertainty regarding tariffs has rattled markets, causing significant volatility in the S&P 500. Markets inherently dislike uncertainty—a sentiment encapsulated by Benn Eifert, Co-founder and CIO of QVR Advisors:
“If there is one lesson from global economics over the last century, it is this: stability, rule of law, and the quality of government are much more important than corporate tax rates and moderate differences in regulations.”
A timely reminder that policy uncertainty often weighs more heavily on markets than the policies themselves.
In Conclusion
Many clients have, understandably, felt unsettled by the recent news cycle—from political turbulence to falling markets and the broader uncertainty we’ve entered. Our message remains clear: prudent capital managers—those who avoid chasing momentum or riding bubbles and instead focus on owning high-quality companies—are likely in the best position to weather market volatility.
Anyone who took college economics may recall noted textbook author and economist Paul Samuelson, whose famous quote feels especially timely: “Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”
Michael P. Moeller, CIMA®
Portfolio Manager & Director of Research