MW 'Even God would get fired.' The lessons this fund manager is taking from stock-market drawdowns and recoveries.

By Steve Goldstein

Akre Capital's John Neff said he has been increasing cash holdings this year

There was a fascinating study published in 2021 - "Even God Would Get Fired as an Active Investor."

Even if you knew the best performing stocks five years in advance and bought them, the study pointed out, you would still experience crushing drawdowns. The declines would be as much as 76% during the Great Depression, but even on the order of 40% or so during the global financial crisis and the dot-com bubble. A hedge fund where the omniscient could also short the worst performers would do great, but still see drawdowns of as much as 47%.

John Neff, the chief executive and chief investment officer at Akre Capital Management in leafy Middleburg, Va., cited that study in his just published second-quarter shareholder letter. He also cited research from Morgan Stanley's Michael Mauboussin and Dan Callahan, who similarly noted the best six companies out of 28,600 from 1926 to 2024 - Apple $(AAPL)$, Microsoft $(MSFT.UK)$, Nvidia (NVDA), Alphabet $(GOOGL)$, Amazon $(AMZN.UK)$ and Exxon Mobil (XOM) - suffered an average maximum drawdown of 80%. And the median stock price recovery from the drawdown bottom was 89.6%, which means that the typical stock failed to return to its peak for investors who bought at the high.

But Neff also pointed out the study's finding that the highest quality companies nearly doubled in value from their prior peak, five years after bottoming. "We believe the findings corroborate our long-held notion that a compounding investment approach has subtle, but important distinctions from value investing. Those distinctions center on the primacy of business quality," he says.

Neff said during the COVID bear market, his firm bought $1.1 billion in equities in March 2020, but avoided airlines and cruise liners, the hardest hit. In the short term, that was a mistake - the U.S. Global Jets ETF JETS bounced 86% from March 30, 2020, but he didn't see airlines as quality businesses. "By the second anniversary of that well-timed JETS purchase, the annual rate of return dropped to 22.31%. By June 30, 2025, the annualized return off the bottom stood at 9.15%," Neff notes.

By contrast, the firm's March 2020 investments appreciated 75% in a year, but have now compounded at 22% excluding dividends.

At the moment, the Akre Focus Fund's AKREX top holdings include Constellation Software (CNSWY), Mastercard $(MA)$, Visa (V), Brookfield (CA:BN), KKR $(KKR)$ and Moody's $(MCO)$. Given the recently passed stablecoin legislation, MarketWatch asked about the potential competition for Mastercard and Visa. "I'm of the view that to the extent these become useful in a payments context that they mostly join the ranks as just another currency for the networks to incorporate," he said.

He also said he's raised his cash holdings, to 8.1% from just 1.4% at the start of the year. "We have made a point of raising our cash position in case our valuation discipline and patience gets rewarded in the weeks and months ahead," he said in the shareholder letter. Neff told MarketWatch there's no sense of an imminent catalyst for his move into holding more cash, but just wanted more dry powder to deploy on new investments.

The market

U.S. stock futures (ES00) (NQ00) were inching higher from record levels. Gold (GC00) futures rose, while the U.S. dollar DXY fell.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6297.36    0.27%   5.29%   7.07%   13.58% 
   Nasdaq Composite                                                     20,885.65  1.24%   6.85%   8.16%   16.87% 
   10-year Treasury                                                     4.448      3.60    6.50    -12.80  20.60 
   Gold                                                                 3358.9     -0.34%  -0.75%  27.26%  39.79% 
   Oil                                                                  67.05      -2.47%  -9.44%  -6.71%  -14.69% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Netflix (NFLX) late Thursday reported stronger-than-forecast earnings, buoyed by a weaker dollar and increased advertising and membership in the first period in which the streamer didn't report subscriber numbers.

Fed Gov. Christopher Waller, after the stock market closed on Thursday night, made his case for interest-rate cuts, citing the weakening private-sector payrolls growth and that a range of economic data are suggestive that policy should be neutral rather than restrictive.

Separately, Fed Chair Jerome Powell wrote to the White House on the central bank's renovation project overruns, a factor that could be used in any attempt to fire him.

Union Pacific (UNP) and Norfolk Southern $(NSC.AU)$ are in merger talks to create the largest railroad in North America that would connect the East and West Coasts.

Interactive Brokers (IBKR), benefiting from the retail investing boom, reported better-than-forecast results.

3M $(MMM.AU)$ and American Express $(AXP.AU)$ are set to report results.

Housing starts data is due for release and after the open, the University of Michigan's consumer-sentiment index.

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The chart

The story of the week in financial markets has been the combination of solid economic activity while, so far, restrained inflation. Analysts at Citi compared prices for tariff-sensitive goods last month to how they were at the beginning of the year. As the chart shows, while not universal, it looks like goods prices are rising, though in the overall consumer price data that was offset by shelter and services costs. "This portends some risk from tariff impact for equities and has potentially tempered investors from over-exuberance around the asset class. Deals, delays and [moving] deadlines keep us overweight equities in the absence of a more discernible tariff impact or positioning risks," say strategists led by Dirk Willer.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   NFLX    Netflix 
   PLUS    ePlus 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AMD     Advanced Micro Devices 
   TSM     Taiwan Semiconductor Manufacturing 
   NIO     Nio 
   OPEN    Opendoor Technologies 

Random reads

The story that took over the internet on Thursday - Coldplay's 'kiss cam' zeroes in on mortified tech CEO Andy Byron and HR-chief Kristin Cabot.

The world champion at doing absolutely nothing.

The world's largest Scotch egg checks in at an impressive 17 pounds.

-Steve Goldstein

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(END) Dow Jones Newswires

July 18, 2025 06:51 ET (10:51 GMT)

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