Good Returns Can Hide Bad Investing
Invested In Us | Issue 22 | Week of July 21, 2026
The stock market continues to perform well, but that does not mean this has been an easy year to invest.
Companies are reporting strong profits, and analysts currently expect S&P 500 earnings to grow by more than 20% in 2026. FactSet’s latest estimates call for approximately 24% earnings growth for the full year, while second-quarter earnings are currently tracking above 20% compared with the same period last year.[1]
I do not believe companies can maintain that type of growth forever. Eventually, the comparisons become more difficult, economic conditions change and earnings growth normally returns to a more sustainable pace. But for now, corporate profits have remained strong enough to help support stock prices.
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State of Capital
As of last Friday, the S&P 500 was up approximately 9.4% for the year and remained near its all-time high.[2] That sounds like a relatively calm and profitable year when you only look at the final number, but anyone who has been paying attention knows the journey has been much more complicated.
We have experienced sudden declines, sharp recoveries, changing interest-rate expectations and multiple geopolitical concerns. The market has also spent much of the summer moving within a relatively tight range. This is the type of environment where the index can be up while individual investors are still losing money by chasing what has already gone up, selling during periods of fear or constantly changing their investment strategy.
That is why I always say the return of the market and the return earned by the average investor are not necessarily the same thing.
The Market Is Beginning to Broaden
Value Stocks vs. Growth Stocks
One of the more interesting developments this year is that leadership has started to broaden beyond the same handful of large technology companies.
Value-oriented businesses and sectors connected to physical assets, infrastructure and the economy have performed well. Through last Friday, energy stocks within the S&P 500 were up approximately 30%, industrials were up approximately 16% and real estate was up 18%. Information technology was also up approximately 15%, so this is not a story of technology suddenly becoming irrelevant. It is a story of more parts of the market beginning to participate.[2]
Value companies are generally mature businesses trading at more reasonable prices relative to their earnings, cash flow or assets. Many of these companies return a portion of their earnings to shareholders through dividends or stock repurchases.
Growth companies, on the other hand, generally reinvest more of their earnings into the business in an attempt to grow revenue and profits at a faster pace.
Neither category is automatically better.
A growing company can be a terrible investment when investors pay an unreasonable price for that growth. A slower-growing value company can also be a poor investment when the business is declining and the low valuation is justified.
The real question is always what you own, why you own it, how much you paid and whether the business can realistically deliver the results investors are expecting.
Global Markets Deserve Your Attention
International markets have also reminded investors why diversification matters. Emerging-market stocks have outperformed many U.S. and European benchmarks this year, showing once again that the United States will not lead every market cycle.[3]
That does not mean investors should abandon American companies and move everything overseas. It means we should be careful about building portfolios around the assumption that whatever performed best over the last several years will automatically remain the winner forever.
Real Assets Are Having A Moment
Energy, commodities and other tangible assets have been among the strongest areas of the market this year.
The broad S&P GSCI commodity index was up nearly 30% around the middle of July, while energy-related commodities were up substantially more. Precious metals, however, were down approximately 9%, including declines in both gold and silver.[4]
This is an important reminder that even investments grouped within the same broad category can perform very differently.
The strength in energy has been influenced by geopolitical conflict, supply concerns and the growing pressure being placed on global energy infrastructure. The continued growth of artificial intelligence, data centers and electrification is also increasing the amount of power required throughout the economy.
When investors become concerned about inflation, geopolitical instability, government spending or the purchasing power of currencies, they often look toward assets connected to something tangible. That can include energy, commodities, pipelines, infrastructure, land, buildings and other assets capable of producing cash flow or serving an essential economic purpose.
That does not mean every real-asset investment is safe. Commodities can be extremely volatile. Real estate can struggle when financing becomes more expensive. Energy investments can rise or fall quickly based on supply, demand and political developments.
The larger lesson is that investors appear to be placing a greater value on businesses and assets that produce something, transport something, store something or own something tangible.
The Bond Market Is Telling A Different Story
While stocks remain near record highs, the bond market continues to demand a meaningful return for lending money to the United States government.
The 10-year Treasury yield closed at approximately 4.55% last Friday. Earlier in the year, that same yield briefly moved below 4%.[5]
When Treasury yields rise, it generally becomes more expensive for families, companies and the government to borrow money. Higher yields can influence mortgage rates, business loans, commercial real estate values and the price investors are willing to pay for stocks.
There are several factors affecting interest rates, including inflation, economic growth and expectations surrounding Federal Reserve policy. However, the country’s growing debt, persistent budget deficits and continued spending are also part of the conversation.
The Congressional Budget Office continues to project that federal debt held by the public will rise relative to the size of the economy over the coming years.[6]
The bond market is essentially saying that if investors are going to lend the government money for 10 years, they want to be compensated for inflation, uncertainty and the possibility that the government will need to issue significantly more debt in the future.
This is why we pay attention to both the stock market and the bond market.
Stocks may be telling us that investors remain optimistic about future corporate profits. Bonds may simultaneously be telling us that money remains expensive and that the risks surrounding inflation and government finances have not disappeared.
Both messages can be true at the same time.
How Professionals Conduct Due Diligence On A Fund
People regularly ask me how large investment firms evaluate a mutual fund, ETF, hedge fund or private investment fund.
It is much more than looking at last year’s return.
We normally begin with the people responsible for managing the money.
Who is making the investment decisions? What experience do they have? Where have they worked? What credentials or designations do they possess? Have they managed money through multiple market cycles, or have they only operated during favorable conditions?
Where someone went to school or previously worked does not guarantee that they will be a good investor. However, their background can help us understand whether they have the experience, knowledge and resources required to execute the strategy they are selling.
We also want to know whether the same team that produced the historical performance is still managing the fund. A strong track record may be less meaningful when the portfolio manager responsible for producing it has already left the firm. The Securities and Exchange Commission specifically encourages investors to look beyond past performance and consider changes in management, strategy, risks and fees.[7]
Next, we study the actual investment strategy.
What is the fund trying to accomplish? Is the goal income, long-term appreciation, capital preservation or some combination of the three?
How is the portfolio invested? Is it diversified across hundreds of holdings, or is it concentrated in a small number of companies? What are the largest positions? How much could one bad investment hurt the overall portfolio?
Then we examine the investment process.
How does the team decide what to buy? What research do they complete before making an investment? What would cause them to sell? How do they monitor existing investments? How frequently do they rebalance the portfolio? Is the process consistent and repeatable, or does it change every time the market develops a new popular theme?
Professional manager due diligence commonly includes an evaluation of the investment team, investment process, portfolio construction and the operational infrastructure supporting the manager.[8]
Performance also needs context.
What benchmark is the fund attempting to outperform? Is that benchmark actually appropriate for the strategy? Has the manager produced strong results consistently, or did most of the performance come from one unusually good year?
How did the fund perform when markets declined? How much risk did the manager take to produce the return? Did the fund outperform because the manager made good decisions, or because the portfolio happened to own an asset class that was already performing well?
A fund that earned 12% while taking moderate risk may have been managed more effectively than a fund that earned 15% while exposing investors to significantly larger losses.
We also compare the fund with similar strategies. Where does it rank among its peers? Has it consistently performed near the top, somewhere in the middle or near the bottom? Has it produced results across different market environments, or does it only perform well under one specific set of conditions?
Benchmarks and peer comparisons help investors evaluate whether a fund’s performance was actually strong relative to other reasonable alternatives.[9]
Fees matter too.
What management fees, operating expenses, sales charges or performance fees are investors paying? Are there multiple share classes with different costs? Are there additional expenses associated with underlying funds?
A fund does not merely need to make money. It needs to generate enough value to justify what investors are paying. The SEC reminds investors that fees reduce the amount of money remaining in a portfolio to compound over time.[10]
We also look at the health of the investment business itself.
Are assets under management growing or shrinking? Are investors consistently withdrawing money? Is the fund profitable enough to maintain the people, research systems and operational resources required to execute the strategy? Could the fund eventually close or merge because it has failed to attract enough assets?
At large investment firms, the work does not stop with the investment portfolio. Legal professionals may review offering documents, conflicts of interest and regulatory matters. Operational due-diligence teams may evaluate cybersecurity, valuation policies, internal controls, service providers, custody arrangements and how client assets are protected.
Due Diligence Does Not End After You Invest
One of the most overlooked responsibilities of being an investor is continuing to monitor an investment after the money has been committed.
Due diligence is not something we complete once, place inside a folder and never revisit.
Performance should be reviewed over time, but investors should not panic simply because a fund underperforms for one quarter. The more important question is why it underperformed.
Was the weakness consistent with the fund’s stated strategy? Did the manager follow the same investment process that originally attracted you to the fund? Has the team changed? Have the largest holdings changed? Has the fund taken on more risk? Are the fees still reasonable? Is the strategy still serving the purpose it was originally selected to serve?
Everyday investors have more access to this information than many people realize.
They can read annual and semiannual shareholder reports. They can review investor letters, fund commentary and portfolio updates. They can read the manager’s research, listen to interviews and participate in shareholder webinars or Zoom calls when those opportunities are available.
Registered mutual funds and ETFs are required to provide shareholder reports containing information that can help investors understand performance, expenses and portfolio holdings. The SEC specifically describes these reports as tools that retail investors can use to assess and monitor their investments on an ongoing basis.[11]
The goal is not to turn every investor into a full-time portfolio analyst.
The goal is to remain informed enough to understand what you own and recognize when something has materially changed.
You do not need to watch the fund every day. You do not need to react to every market decline. But you should periodically read what the manager is saying, compare those comments with what the fund is actually doing and determine whether the original reason for owning the investment still exists.
Investing should always be based on evidence, not vibes.
A fund’s name, recent return or popular manager may earn our attention. Thorough due diligence is what helps determine whether it deserves our money. Continued monitoring helps determine whether it should keep it.
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