2Q 2025 Newsletter

At Heron Bay Capital Management, we do not take a macro-driven approach to investing. Why? Because history shows that trying to consistently make money by predicting macroeconomic events is extremely challenging —and the track record of those who try is overwhelmingly poor.

In 2023, Victor Haghani, a respected finance academic and practitioner, ran a fascinating real-time experiment to test this idea. He gave both finance professionals and amateurs real money to play a prediction game. The rules were simple: participants were shown the front page of the Wall Street Journal 36 hours before it was actually published, with all market data redacted. Based on that future news, they could bet on whether stock or bond markets would go up or down—or they could choose to sit out. The game ran for 15 non-consecutive trading days, and participants could use up to 100× leverage on their bets to magnify their conviction.

The outcome was telling:

Finance-trained professionals made an average gain of just 3.2% - a result that was statistically no better than chance.
Amateurs fared far worse, with a median loss of 30%, and 16% losing everything.

The lesson? Even with a “crystal ball,” most investors overestimate their ability to interpret news, and take on too much risk. And even if they guess right, taxes and transaction costs can erode much of the gain. So why play a game that is stacked against you?

Since we do not believe macroeconomic events can be accurately forecasted with any consistency, we focus on owning businesses we can understand and underwrite over the long run. We believe that business economics, not macroeconomics, are the more durable and reliable source of returns. We look to understand the secular drivers of companies and the industries in which they operate. We acknowledge that macroeconomic developments impact market movements. And we are aware of these market movements to the degree that they provide opportunities in the businesses we have analyzed. For these reasons, we consider market movement – volatility – to be an opportunity for prepared investors. Price change is part of what creates opportunities for attractive long-term returns. While drawdowns are uncomfortable, they do not last forever. To cushion the impact of volatility, we maintain appropriate levels of cash and other asset classes, tailored to each client’s goals and risk tolerance.

Volatility remains a valid concern for many investors. Between February 19, 2025—when the S&P 500 recorded its all-time intraday high of 6,215.08 (and a closing high of 6,144.15)—and April 7, 2025, the index declined by approximately 1,161 points, or -18.9%. Including the absolute intraday low reached in early April, the peak-to-trough drawdown surpassed 20%, officially entering bear market territory. On April 8, the VIX—widely regarded as the market's “fear gauge”—spiked to 52, reflecting heightened investor anxiety. Since then, it has retreated sharply, reaching 16.73 by June 30, 2025. Notably, the S&P 500 has rebounded to 6,204.95 as of June 30, 2025. Understandably, we received a few calls from clients amidst all this volatility.

Those who panicked and sold in early April locked in losses - and may still be waiting on the sidelines for the “right time” to reenter the market. These individuals are subject to trying to make a macroeconomic judgement, which we already addressed as a losing proposition. By contrast, history suggests that the right thing to do when the VIX spikes is to lean in. When the VIX exceeded 40, the average 1-year forward return for the S&P 500 has been 25% to 30%, with positive outcomes over 90% of the time.

That is exactly what we did.

Rather than trying to time a bottom, we used the volatility to reposition portfolios, rotating into high-quality businesses that were temporarily mispriced. In our Large Cap strategy, for example, we trimmed positions in stocks that held up well in the down market—Berkshire (BRK.B), Comcast (CMCSA), AB InBev (BUD), and Fox (FOXA)—and added to or initiated positions in Zoetis (ZTS), Corpay (CPAY), TransUnion (TRU), and KKR. Similar trades were made across all our strategies. We used the temporary mispricing in a number of businesses to the advantage of clients. Most clients are invested in a blend of these strategies, designed to produce strong long-term risk-adjusted returns.

While it is too early to know how these specific trades will perform, acting during periods of dislocation helps in two ways:

It allows us to upgrade portfolios at attractive prices.
It does so with lower tax impact, taking advantage of existing unrealized losses or low-cost basis offsets.

This approach is a hallmark of our disciplined and repeatable process at Heron Bay. We believe that over time, a sound process should lead to more than satisfactory investment outcomes. However, the fundamental basis for making the right decisions for clients rests on incorporating each client’s personal circumstances into an appropriate asset allocation model. If you have experienced significant life events since we last spoke, please do not hesitate to reach out.

As always, we are grateful to serve. Happy Summer!

For more information on Victor Haghani‘s experiment, visit https://elmwealth.com/crystal-ball.