Avoiding the 'Big Mistake'
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you need to go.” - Benjamin Graham
Peloton’s new CEO, Barry McCarthy, started his Q3 FY 2022 Shareholder letter with, “Turnaround are hard work.” The same can be said about investing.
We were fortunate, and borderline spoiled, with about a decade of loose monetary and fiscal policy.
Consumers and investors took advantage of ‘free’ money as interest rates were so low. Investors flocked toward high-growth technology companies, and borderline ignored the rest of the markets.
At the time, this made sense. These companies were growing at insane levels and investors didn’t care that they weren’t producing profits as long as the company continued to grow, and the stock price appreciated.
But, as Michael Batnick put it the other day, “Everything in the market is temporary, even when it feels permanent.”
Behavior is by far the dominant element in investing. Investors were chasing narratives and looking for that next home run, because their neighbors sisters dog 10x’d their return on dodge coin in a matter of weeks or even days.
You could almost do no wrong. We became accustomed to investing and earning strong returns in such a short-period of time.
Remember when GameStop and AMC were both up 500%+ in a matter of days/weeks?
Of course it seemed insane but that’s just how it was.
But now it’s clear the sentiment has changed drastically.
The AAII Sentiment Survey measures the percentage of individuals who are bullish, bearish, and neutral about the stock market over the next six months. As you can see, the ‘bearish’ sentiment has taken this year by storm:
It has now become evidently clear that the Federal Reserve pumped too much liquidity into the markets for too long.
Instead of focusing entirely on growth, companies and investors have shifted their priorities to stabilizing cash flow and investing in companies that actually make money.
Turns out fundamentals do matter.
Here are some staggering, and hopefully not completely depressing, stats:
As of a few weeks ago (and presumably this has only gotten worse), 45% of Nasdaq companies were down 50%
More than 22% of Nasdaq companies were down 75%
It’s not just the true speculative companies that are getting reset, we are seeing major repricing in some of the biggest/most successful companies:
Year-to-Date Returns:
Netflix -71%
Facebook (I’m not calling it Meta) - 42%
Amazon -36%
Tesla -37%
Microsoft -23%
I could keep going but you get my point.
So, how do we approach this market and ultimately avoid making big mistakes?
Remind yourself why diversifying matters: In 2020, and most of 2021, it was easy to become concentrated in one area of the market. Investing in Large US technology companies almost guaranteed you a return. All companies had to do was become a meme stock and they were rewarded.
Diversifying your portfolio helps mitigate losses during downturns. Sure, you won’t capture all the upside if you were in 100% stocks, especially growth names, but you won’t get completely killed either once we get a correction (like now).
Don’t try and time this market: The amount of times I’ve heard, “well I just want to sell now and then get back in when things are better.” The problem with that is you need to be right twice. When is the right time to get out and then when is the right time to get back in? If you know the answer to this, by all means let me know because I don’t have a clue. I’ve shared this chart before, but just a friendly reminder:
Yes, inflation, supply chain issues, Russia/Ukraine, have dragged on longer than we had hoped. It’s going to take time to break the back of inflation and cool things down. But we simply can’t afford to miss any of these good days.
We will get through this: During down markets, it’s important to take a step back and look at the bigger picture. The media will pounce on bad news and make sure everyone is aware of it. CNBC will do their usual ‘markets in turmoil’ and promise to find out exactly why markets are falling and predict when it will bottom.
Well, I’m hoping you are starting to realize that when it comes to investing, and almost anything in finance, you can never be 100% certain about anything. There will always be reasons to not invest, and the media will make damn sure you are aware of all of them:
I will forever be an advocate of making the most out of your money. But that doesn’t necessarily mean generating the highest returns.
Often times its about avoiding unforced errors and not making that big mistake that completely erodes your financial picture.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.