Key Takeaways
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In today’s equity market environment, price discipline is critical — even for “must-own” companies.
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Market indexes are more concentrated than ever, increasing risk for passive investors.
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Active strategies can be a valuable way to diversify and potentially improve long-term results.
The U.S. equity market is in rare territory. If you own a diversified portfolio, there’s a good chance that a growing share of your wealth is tied to the performance of just a handful of mega-cap stocks — the companies that dominate the S&P 500. The problem? These businesses may be excellent, but history shows that paying any price for quality can be dangerous.
Today, both U.S. household allocations to equities and the weight of U.S. large-cap stocks in global benchmarks are near record highs. In other words, investors are more exposed to this small group of companies than they have been in decades. At the same time, measures like the cyclically adjusted price-to-earnings (CAPE) ratio, which has generally proven to be an excellent predictor of returns over longer periods such as ten years, are indicating that future long-term returns for these stocks are likely to be below average from here.
This is not the first time we’ve been here. In the 1960s and 70s, the so-called “Nifty Fifty” were considered one-decision stocks — businesses so exceptional that you could buy them and hold them forever. Investors paid any price to own them, assuming their growth would justify it. Eventually, however, reality caught up. Many of those stocks dramatically underperformed for years, inflicting lasting damage on portfolios.
The lesson is simple: price matters. Even the strongest businesses face shifting risks — regulatory changes, competitive threats, geopolitical tensions, and leadership transitions can all affect their fortunes. A company can be a safe, attractive investment at one price and a very risky one at another. Ignoring valuation is effectively ignoring risk.
Unfortunately, market-cap-weighted indexes don’t take valuation into account. They simply give more weight to yesterday’s winners, meaning that as these stocks rise, they become a bigger part of your portfolio whether you intended it or not. Without deliberate rebalancing, investors end up concentrated in the most expensive parts of the market — just as their return potential may be the lowest.
This is where active, price-conscious strategies come in. By looking beyond, the most popular names and carefully assessing both quality and price, active managers can seek out investments that offer better prospective returns and help restore diversification. In fact, periods when active strategies are most out of favor have historically been the best times to add them — precisely because they offer something different than the market’s most crowded trades.
At Third Avenue, we believe that now may be one of the most important moments in recent history to reintroduce price-conscious value investing into your portfolio. By focusing on businesses trading at prices that reflect uncertainty — and by avoiding the temptation to simply chase the market’s favorites — we aim to provide investors with an opportunity to participate in equity markets while managing risk in a much more deliberate way.
IMPORTANT INFORMATION
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this article represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of
the firm as a whole. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund investment may differ materially from those reflected or contemplated in any such forward- looking statement. The S&P 500 Index, or the Standard & Poor's 500 Index, is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market capitalization because there are other criteria to be included in the index.
Based on portfolio manager commentary first used on July 16, 2025
Distributor of Third Avenue Funds: Foreside Fund Services, LLC.