Cole Adaskaveg

Hello everyone, and welcome back to Cole's Corner.

I had a fascinating conversation with a sharp, disciplined client the other day. We were discussing the market's performance, and he expressed a familiar frustration. Despite owning a portfolio of what we consider to be exceptionally high-quality companies—businesses with strong balance sheets, consistent earnings, and durable competitive advantages—his returns were lagging the broader S&P 500 this year.

Why? Because a huge portion of the market's recent gains has been powered by a very narrow group of mega-cap tech stocks, fueled by a frenzy around artificial intelligence. His portfolio, built for long-term resilience, wasn't fully participating in this speculative fever.

But our conversation quickly evolved from the specifics of one year's performance into a much deeper topic: the nature of risk itself. It got me thinking that most investors misunderstand what risk truly is. We tend to think of it as a dial we can turn up or down. But the truth is, you can't turn the dial to zero. You can only choose which kind of risk you're willing to accept.

The Two Flavors of Risk
When people talk about "taking on risk," they usually mean one thing: buying volatile, high-beta, or speculative assets in the hopes of outsized returns. This is the obvious risk. It's the risk of betting on an unproven company or trying to catch a wave like the current AI boom. The potential rewards are high, but so is the potential for permanent capital loss if the story falls apart. This path requires impeccable timing and a strong stomach.

But what my client was experiencing is the other, more subtle flavor of risk. It's the risk that comes from not participating in the speculative frenzy. By committing to a disciplined strategy, like owning quality businesses at reasonable prices, you accept the risk of underperformance. It's the risk of looking wrong in the short term. Your companies won't go to zero, but they may be ignored or undervalued by a market that's chasing a different narrative.

This is a crucial concept that the legendary investor Howard Marks discusses in his memos. He argues that the greatest investment risk isn't volatility, but the danger of paying too much for an asset and suffering a permanent loss. Sticking to a quality-focused discipline is designed to prevent that exact outcome. The price you pay for that protection, however, is that you will almost certainly lag the market during periods of speculative excess.

Mr. Market and Your Most Valuable Asset
This dilemma is as old as the market itself. Benjamin Graham, the father of value investing, illustrated it perfectly with his parable of "Mr. Market." He imagined the market as a moody business partner who shows up every day offering to buy your shares or sell you his. Some days he's euphoric and names a ridiculously high price. Other days he's despondent and offers to sell you everything for pennies on the dollar.

An investor chasing the obvious risk is trying to ride Mr. Market's manic highs. The disciplined, patient investor is waiting for the depressive lows to buy quality at a discount. The challenge is that Mr. Market can stay euphoric for a lot longer than you might think, making the patient investor feel foolish for sitting on the sidelines.

This is where the ultimate differentiator comes into play: temperament.

The stock market, as Warren Buffett famously said, "is a device for transferring money from the impatient to the patient." Your ability to endure periods of underperformance, to stick with your plan while others are getting rich off trends you don't understand, is your single greatest asset. It's far more important than picking the right stock or fund in any given year.

Zooming Out
So, what's the takeaway? Whether you are taking the obvious risk or the subtle one, you are paying a price of admission for the chance to earn long-term returns.

The real question is not how your portfolio performed over the last twelve months, but whether your plan is sound enough to carry you through the next twelve years and beyond. What difference does one year of underperformance—or even outperformance—truly make in the grand scheme of a financial plan designed to last a lifetime?

Patient investors, who understand the risk they've chosen and have the conviction to stick with it, are always the ones who come out on top. It isn't always easy, but it's the only game worth playing.

Until next time,
Cole

The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Morgan Stanley Wealth Management recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Any type of continuous or periodic investment plan does not assure a profit and does not protect against loss in declining markets. Since such a plan involves continuous investment in securitiesregardless of fluctuating price levels of such securities, the investor should consider their financial ability to continue their purchases through periods of low price levels. Morgan Stanley Smith Barney LLC. Member SIPC. CRC 4898924

Hey everyone, and welcome back to Cole's Corner! This week, I want to talk about something that's on everyone's mind: money. Specifically, how to grow it.