Rational Reflections October 2026 by Bell Bank

Challenging Conventional Wisdom and Excess Returns Excess returns require seeing something the crowd does not, and then waiting for the crowd to see it too.

The Price Is the Consensus The main goal of active investing is to obtain returns that are greater than those of the benchmark or market. But how does an investor go about beating the market? We know that all investable assets have a price that is readily available. We also know that a price is nothing more than the market consensus for future revenue growth, margins and reinvestment needs. Combine the three and you get cash flows. These future expectations are then discounted back to the present. In other words, a price is simply the market consensus made tradeable.

Price = Future Cash Flows Discounted Back to the Present

If the consensus is already built into the price, buying the index means that you agree with whatever the market believes. By contrast, every active investment decision is a disagreement with that market consensus. When an investor buys a stock, they need to remember that each transaction is two-sided. On one side is the buyer, and on the other side is a (likely) equally informed seller. This is what makes earning excess returns so difficult. If the market consensus is already baked into the current price, then buying what everyone else agrees is an excellent company will not earn you market-beating returns. Market-beating returns require disagreeing with consensus.

How Consensus Forms There is a structural reason the consensus sits where it does. Capital tends to follow what has performed well recently. If everyone believes in the consensus, it must be true, right? At many asset management firms, it is easy to approve an asset class or stock that has performed well over the trailing three years. However, what many fail to realize is that much of the return that built that performance has already been earned. The consensus view and the crowded position are usually the same thing. This is why having a differentiated view often seems flimsy. The differentiated view appears to be cloaked in weak logic and cannot be easily justified with currently available evidence. However, this is when it is also the most valuable. So how does an investor act on a view that looks flimsy?

For informational purposes only. Not investment advice. Past performance does not guarantee future results. Investing and wealth management products are: Not FDIC insured | No Bank Guarantee | May lose value | Not a deposit | Not insured by any federal government agency

RATIONAL REFLECTIONS | Q4 2026

The Three Requirements In order to obtain a return that is greater than the market, a few requirements must be true.1 First, an investor needs to have a view that is different from the consensus. Second, the investor needs to be right (when you are wrong, the knife cuts the other way). And finally, the third requirement dictates that once you have acted upon your differentiated view, you need the patience to wait until the market comes around. Being early and being wrong look identical in the interim. Let’s take a closer look at each requirement in practice. Requirement #1: The differentiated view is easiest to see with hindsight, so let’s start with the example of Apple in 2013. Apple stock peaked on Sept. 19, 2012 at $702.10 and then proceeded to fall to $390.53 on April 19, 2013, a total decline of 44%.2 The decline was due to Apple experiencing supply chain issues, missed sales targets and competitors gaining market share. At the bottom, the market consensus (the crowded view) was that Apple would continue losing market share and that it was just another hardware company. Apple had already reached its peak and was now a company in decline. On the flip side, the differentiated view was that Apple was in fact not a declining hardware company, but rather one still on the ascent with nearly unlimited potential. This viewpoint believed Apple was just sorely misunderstood. Apple offered an ecosystem with unmatched customer retention, a high degree of pricing power and a services business that was still small at the time but was attached to an installed base of hundreds of millions of devices. Because of the underlying strength of the business, sales were likely to recover, and the supply chain issues were likely to get sorted out. Requirement #2: The view of Apple described above had to be correct, which it was. Consider the alternative: by most common valuation metrics (we have written at length about the shortcomings of valuation ratios in the past3), General Electric, for example, looked cheap in 2017 and 2018 after the first leg down in the stock. Contrarians bought the fallen blue chip on that basis. Their differentiated view was wrong. The power business deteriorated, the dividend was cut twice,4 and the stock lost most of its remaining value over the following two years. The stock was cheap for a reason! Being different and incorrect cost the investor money. Requirement #3: An investor taking this view of Apple needed to have the patience to see their conviction through. An investor who bought Apple on Dec. 4, 2012 at $575.85 (already down 18% from the peak) then watched the stock fall another 32% to the April 2013 low. That investor, assuming they held on, would not have recovered their money until April 28, 2014, when the stock closed at $594.09 following the fiscal second quarter earnings release. This is despite being 100% correct about Apple being a future star.

RATIONAL REFLECTIONS | Q4 2026

Source: Bell Institutional Investment Management. Hypothetical illustration of an investor’s estimate of intrinsic value versus the market price over time. Not based on any actual security. For illustrative purposes only.

A Second Example: Meta in 2022 We covered Meta in a prior piece on thinking backwards from price to expectations,5 and it fits the three requirements here as well. Meta’s share price peaked at $382.18 on Sept. 7, 2021 and bottomed at $88.91 on Nov. 3, 2022, a 77% drawdown over roughly 14 months. The causes were heavy capital spending on the Metaverse and Apple’s App Tracking Transparency (ATT) initiative,6 which made Meta’s advertising less measurable. At the bottom, the consensus was that growth was gone, profitability would keep falling, and dollars being spent on capex were being wasted. Now, let’s take a look at the three requirements in this case. Requirement #1: The differentiated view was that very little about the underlying business had changed. Meta’s family of apps still reached more than 3.7 billion people every month7 and its network effects remained intact. The advertising business, even after ATT, was still one of the best available and likely to keep producing large amounts of cash flow. The capital spending, originally aimed at the Metaverse, built the data center capacity that Meta later needed for AI. Requirement #2: This view turned out to be correct. Due to the necessity posed by ATT, Meta developed its own tools to measure advertising effectiveness. The second order effect was that Meta’s advertising business became even stronger. The intrinsic value of the company never really changed much. The only thing that changed was public perception. Requirement #3: Patience was required to see the differentiated thesis through. Meta fell 26% in a single day on Feb. 3, 2022 following its fourth quarter earnings release, closing at $237.76. An investor who saw that as a buying opportunity and bought that day was correct about the business. Unfortunately, they still ended up watching the stock fall another 63% over the next nine months. That investor did not get back to their purchase price until April 27, 2023, after the first quarter earnings release. Most investors would not have had the patience required to make this a successful investment.

RATIONAL REFLECTIONS | Q4 2026

Source: Morningstar. Meta Platforms daily closing prices, unadjusted, June 2021 to June 2023. The dashed line marks the February 3, 2022 purchase price and the first close back above it.

Conclusion Most of the time, the consensus is right, or at least close enough. The return that is available to most investors is the market return. The market return should serve as the base case with excess returns serving as the exception. But as the Meta and Apple examples show, when the consensus becomes accepted as fact, there may be an opportunity for outsized returns for someone willing to take a different view. Greg Sweeney, our chief investment and economic strategist, opened his September economic outlook with the classic “My Wife and My Mother-in-Law” illusion.8 This is the famous drawing that appears to show a young woman to some and an old woman to others. Greg’s point with this example was that two people can look at the exact same information but still walk away with wildly different conclusions. Remember, each time you buy a stock, there is someone on the other end selling it with access to the same information you have. Of the three requirements for excess return that we’ve discussed here, the first is the easiest to satisfy. However, it is also the least valuable on its own. Anyone can disagree. The second requires performing the work of translating a current price into the expectations it implies and then asking whether those expectations are reasonable. The third requires temperament. Analysis can give an investor the conviction to act against the consensus. However, it will not shorten the wait that follows or make it any less miserable.

Keeping the Feedback Loop Open It is entirely possible that you disagree with a variety of the assumptions in this article. Rather than dismiss alternative analyses as wrong, we are better served by keeping our feedback loop open. If you would like to share your opinion and/or critique ours, please feel free to share your thoughts. One of the great aspects of investing is that if you get something wrong, you always have the opportunity to change it. Refusing to change a narrative, just because it is yours, is nothing more than hubris.

Jordan Bancroft, CFA, CAIA® VP/Portfolio Manager Fargo | jbancroft@bell.bank

RATIONAL REFLECTIONS | Q4 2026

End Notes Aswath Damodaran, “Active Investing: Rest in Peace or Resurgent Force?” Musings on Markets, December 2016. The three conditions for beating the market, being different from the consensus, being right and waiting for the market to correct, follow his framing.

Source: Morningstar. Apple daily closing prices, unadjusted for the 7-for-1 split in June 2014 or the 4-for-1 split in August 2020. On a split-adjusted basis the September 19, 2012 peak is $25.08 and the April 19, 2013 low is $13.95.

Bell Rational Reflections, Vol. 8, “The Shortcomings of Using Ratios in Valuation,” November 2025.

General Electric cut its quarterly dividend from $0.24 to $0.12 per share in November 2017 and to $0.01 per share in October 2018.

Bell Rational Reflections, Vol. 5, “Thinking Backwards,” September 2024.

ATT is a privacy framework from Apple that requires iOS apps to ask users for permission to collect and share their data. Advertising companies such as Meta used this data to determine conversion rates on advertising. Without the ability to determine advertising effectiveness, digital advertising was less valuable and less certain.

Meta Platforms, third quarter 2022 results, October 26, 2022. Family monthly active people were 3.71 billion as of September 30, 2022.

Greg Sweeney, Bell Institutional Investment Management, Economic Outlook, September 2026. The “My Wife and My Mother-in-Law” drawing is usually

credited to cartoonist W. E. Hill, who published it in Puck in 1915, adapting an earlier anonymous German postcard.

Disclosures This communication reflects the personal opinions, viewpoints and analyses of the Bell Institutional Investment Management (BIIM) employees providing such comments, and should not be regarded as a description of advisory services provided by BIIM or performance returns of any BIIM client. The views reflected are subject to change at any time without notice. Nothing in this communication constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BIIM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.