Lessons From 2022
As this year winds down and we look forward to sharing holidays with family and friends, I thought it would be a good idea to look back on a chaotic 2022 and ask, “What are the lessons I need to learn?”
In the spirit of a Top 10 list—because who doesn’t love a Top 10 list—here is what I came up with (with a little help from two friends):
1) Bear markets happen: I’m 48 years old and this is the seventh bear market in my adult life. They happen, a lot. In fact, you can pretty much expect two bear markets every decade for the rest of your life. You have to survive them to reap the benefits of bull markets.
2) Setbacks are the result of those bear markets: There is no strategy, or level of sophistication, that will guarantee you will never experience a setback while investing. Avoiding drawdowns while investing in the stock market is just short of impossible. What matters is how you deal with setbacks when they arrive.
3) “Cash is the oxygen of freedom” – Morgan Housel: Investors who are sleeping well this year had a pile of cash they could point to and say: “That’s going to get me through this bear market.” Even if stocks are going straight up you need to maintain a cash reserve—and it should be untouchable. Why? Because of #4.
4) Things change quickly, way quicker than we think: For the better part of a decade we had zero rates and low inflation. That changed instantly in 2022 and the vast majority of people were caught off guard and struggled to understand why it was happening. 2021 was one of the best years ever to be an investor, 2022 is one of the worst. It happened that fast.
5) Bonds and stocks can go down at the same time: For decades the place to hide out when stocks fell was in bonds. It was very rare for them to lose money in the same year. In 2022 they both went down together. Just because something RARELY happens doesn’t mean it CAN’T happen. Like me working out.
6) When money is free, people do stupid things with it and that leads to instability: In retrospect, the next time I see someone paying $1 million for a picture of a rock on the internet, it might be time to get more defensive. There was just too much money sloshing around the system last year while rates were at zero.
7) The US Federal Reserve trumps all: There’s a reason they say, “Don’t fight the Fed.” If the Fed wants to slow the economy to reduce inflation, you don’t want to stand in front of them. Alternatively, when they are easing it’s a breezy tailwind.
8) Stocks aren’t the only investing vehicle: “There’s no yield for my cash” was something we heard for years; zero rates punished savers and basically forced them into stocks (TINA). Now, after the Fed did all that hiking, there are more attractive opportunities in bonds. Are you taking advantage of everything available to you outside of just stocks?
9) “Time horizon is everything”– Ross Mayfield: It defines one’s risk tolerance, needs, and perspective. For a younger investor, a bear market might be celebrated—stocks on sale! A better entry point for long-term investing! For a retiree in the drawdown stage, it means something entirely different. Every single discussion about investing should start with two questions: “How long do I want to invest this money for?” and “What is the purpose of this money?”
10) Because we’re human, this will never be easy: The second-best bull market of all time ended in 2022; it was an incredible decade to grow and compound wealth. Yet investors are miserable because a bad 10 months feels worse than a good 10 years. That’s why this is all so hard: greed and fear are timeless. “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” -Seth Klarman
Bonus lessons learned: Star Wars can have a good TV show (Andor). NY Football teams can win games. Being a good public speaker isn’t easy. In N Out burger is overrated. TX BBQ is as good as they say. Crypto needs way more regulation to survive. Walking 30 minutes a day is one of the best things you could ever do for your body and mind.
Survive and Thrive
For all recorded history, humans have been asked to do two things that are often at odds—Survive and Thrive.
Survival, on a day-to-day basis, is required for a species to avoid extinction. When danger presents itself, we must overcome it or face oblivion.
But if we ignore thriving, we cannot grow and flourish as a species. We must do both at once — even when we’re struggling.
It’s the same for investing.
We are in a bear market right now and bear markets are painful. They last, on average, about 330 days. They fall, on average, about 32% from their peaks. They return to their starting point, on average, in about 1.7 years. Those are averages; bear markets can be better or worse, but you must survive them.
Why is this one so bad? Because of the US Federal Reserve and their fight against inflation. Ben Carlson of RWM said:
“They want the stock market to go down. They want people to lose their jobs and make less money. They will take the economy down if they have to so prices will stop rising.”
If the most powerful entity in the financial world wants the stock market to go down (to crush inflation) they are going to make it go down.
How do you SURVIVE a bear market? Here are 3 things to focus on:
- Cash. Are you cash needs met? Do you have a sufficient pile to cover your bills that are due without having to touch long term assets? My friend Morgan Housel says “cash is the oxygen of freedom,” and it’s one of the only things I know that helps investors sleep better at night.
- Plan. Is your plan updated for current market conditions? Have you simulated what a bad bear market would do to you and your goals? If not do it, so you know what a worst-case scenario does to your financial life. If you don’t have a plan, get one.
- Behavior. Focus on your game and your behavior then ask yourself, how did I act the last time the market fell apart? Are there any regrets you have from 2020, 2018, 2011, 2009, or 2000 about how you navigated those bear markets?
There are certainly more ways to survive a bear market but I want to turn our attention to how we can THRIVE in a bear market. Here are a few thoughts:
- Look for opportunity. For the longest time there was no yield to be found for investors; now it’s everywhere. A 2yr Treasury note yields 4.3% (as of this writing). TINA (there is no alternative **to stocks**) is dead. When this is over, and it will be one day, did you take advantage of every investment opportunity available to you?
- Remember your purpose. Why did you invest in the first place? What was the purpose of this money? Bear markets come and go; there have been 11 in my lifetime, but they don’t change the purpose of why I’m here and why I’ve invested.
- Live. Look, I get it. Stocks are down, bonds are down, prices are high, and uncertainty abounds. But you must live. Tend to family, see friends, go on the occasional vacation, spend time with your spouse. Find beauty in the world. At the end, the only thing anyone wants is more time. Don’t waste it.
The challenges we face in life make us who we are. They define our existence and surround us every day. Surviving and thriving are two sides of the same coin.
The worst thing you can do is assume bad times will continue indefinitely—just like it’s dangerous to assume good times will last forever. Booms plant the seeds of busts like the one we’re in now… but busts also plant the seeds of booms.
We will get through this challenge, like we’ve come through every other challenge we’ve faced. If you focus solely on surviving at the cost of thriving, you will be harming someone you hold dear: your future self.
All investing carries risk and past performance is no guarantee of future results
Was That The Bottom?
As I write this blog, the S&P 500 sits about 12% below the all-time high it made in January. In June of this year it was down 23%—one of the worst starts in history—but since then it has bounced significantly. Which raises the question: Was that the low in June?
I’m teaming up with my friend Ashby from Money Visuals (check him out on Twitter @MVMoneyVisuals) to ponder this topic. Ashby puts complex investing topics into easy-to-understand images, so you can see why we became fast friends.
The issue with calling “bottom” is that it’s only knowable in the future.
There are indicators people look at to try and make this call (breadth thrusts, sentiment, positioning) but none of them have a perfect track record.
When the low was made in March 2009 (Great Financial Crisis) and March 2020 (Covid Crash), no one believed the worst was over. Why? Because headlines were still horrific. In 2009 it seemed like the entire financial system was coming apart and in 2020 a disease we barely understood was just getting going. I mean, of course no one believed the market bottomed (even though it had). Why would they?
Here’s the thing with bottoms: they don’t happen when the news is bright and cheery; they happen when headlines are still scary. In June 2022 we were worried about spiraling inflation, endless Fed rate hikes, and the potential for an awful recession. People were dumping stocks and bonds while contemplating further downside.
Yet we are up over 10% from there….why? Well, things weren’t as bad as we feared (and had priced). Our economy is still adding jobs, corporate earnings didn’t drop as much as we expected, oil and gas prices have fallen, and “motivated” sellers have dried up.
So, was that the bottom? I think it was, UNLESS the US economy falls off a cliff. The worst bear markets (think -30% or more) lie with the worst recessions, so if you don’t think that was the low, you need dreadful things to start happening in order to be right.
Does that mean I think we race back to the highs set in January? No, I don’t think we do. You can be bullish without expecting a rip higher. It’s possible we spend years going sideways.
How should you invest from here? I think this chart sums up my thoughts nicely:
I’d rather be too early than too late. Warren Buffett famously bought stocks in the fall of 2008, way before the market bottomed in March 2009. Do you think he cares today that he bought great companies at good prices before the actual low was in? I bet he doesn’t.
Another thing to remember is that if you’re working with an advisor, they plan for all of this. That’s the whole point.
Selloffs are inevitable and there is NO strategy that will guarantee every year is a successful one. The world is just too complex, and the markets move too fast to say to someone “you’ll never be worried along the way.”
Finally, it’s never going to seem like a good time to buy. If you find yourself saying all of the things in quotes on Ashby’s chart, then it’s going to be super hard to succeed at investing.
Remember, it’s not you versus the market—it’s you versus yourself. Pessimism about the future is seductive; it always seems like the right mindset. Don’t fall into the trap of thinking that just because things are bad, that means they will get endlessly worse.
As you contemplate how to proceed from this moment, consider this framing provided by the WSJ’s Jason Zweig—one of the best to ever write about investing.
“When you buy or sell stocks based on short-term market turmoil, the person you are trading with is your future self. Remember: In every trade, there has to be a winner and a loser. So who is getting the better deal?”
In reality, you have to be a rational optimist: Know that the world (and markets) are a scary place, but don’t let fear stop you from benefiting in the long-term growth of this nation and its stock market.
My wife hates turbulence. If the plane is bouncing up and down she’s gripping the seat and giving me that look.
Before we fly together, I wander over to the website Turbulence Forecast to see if we should expect a rough ride. If the answer is yes, I tell my wife that there will be a few bumps along the way. I set her expectations for the flight.
Does that help? Yes. She’s expecting it, it’s not a surprise. Guess what the worst moment is to tell someone that turbulence is no big deal? When it’s actually happening. They’re scared and you saying “hey, relax, no big deal” is accomplishing nothing. You have to prepare them for it.
It’s no different for the stock market.
Let’s set some expectations so from this moment forward, you know what you face.
Based on the history of the stock market you should EXPECT a selloff of:
-5% Three times a year.
-10% Once a year
-20% Every few years
-50% A few times in your life
These are going to happen to you, they happened to every investor along the way.
We can’t avoid them because they are a lot like turbulence, they come out of nowhere. We can forecast it but that doesn’t mean we know exactly when it will occur.
Behavioral Finance tells us that you can broadly think of your happiness as just “Reality minus Expectations”. H = R-E. Said another way, are things going better for me than I thought or worse?
If you aren’t expecting these selloffs to happen you get upset, reality smacks you in the face and your happiness plummets.
If you are expecting them, like my wife expects the bumps, you can deal with it in a more rational way. Still scary but expected.
2022 has been awful, like severe turbulence over the Pacific Ocean at 3am. Have there been any other times like these? Yep, how about 2020, 2018, 2016, 2011, 2008, 2002, 2001, 1987, do you want me to keep going?
My friend, money isn’t free. You are not guaranteed stock market returns. In order to grow your wealth you have to pay a fee and that fee is fear, unease, and doubt like you are experiencing now.
Look, you don’t need to make amazing buy and sell decisions to do well here, you DON’T. You just have to not blow it in moments like these.
Here is a 100% ironclad guarantee from BullandBaird: There will be more recessions, selloffs, and bear markets in the future. They will happen, it’s inevitable.
You have to persevere, you have to get through them, because on the other side is landing at your destination.
Dealing with a Setback
Let me tell you a story of how bad of an investor I am.
In 2006 our son was born. We tried forever to have him and when he arrived, our family was filled with joy. Little did I know what was about to happen to the World.
On his first birthday, January of 2007, my wife and I took a chunk of our money and dropped it into a 529 account and deployed it 100% into equities. We were hopeful that when he turned 18 it would cover some portion of the gigantic bill that would come due.
On his 2nd birthday, January 2008, it had basically gone nowhere.
On his 3rd birthday, January 2009, that account had lost close to 30% of its value. Two months later it was down 50%. HALF. I HAD LOST HALF MY SONS COLLEGE ACCOUNT.
I was a relatively new Dad, working through the worst financial crisis since the Great Depression, and my tiny son’s college account got nuked. Max pain my friends.
I had two choices: take my money out because I was scared or leave it be. I left it be, what else was I going to do?
On his 5th birthday it was back to breakeven.
On his 11th birthday it had doubled from my initial investment.
This year, on his 16th birthday, it was up 5x from my initial investment.
An account that was started at arguably one of the worst moments in history, that got cut in half along the way, was up 5x just 15 years later. Did I get lucky that this time frame was the 2nd best bull market ever? Sure. Also here’s where I’ll say “past performance is no guarantee of future results.”
What’s the takeaway from my setback? What’s the timeless lesson that I’m trying to convey?
First, it’s that you need a reason to be investing in the stock market. Whether it’s college, or retirement, or a wedding, you need a purpose for your money otherwise you’ll just run for the hills at the first sight of losses. “Make number go up” isn’t enough.
Second, time frames are all that matters. Every single discussion about the stock market should start and end with “how long until you NEED this money?” If it’s the next few years, then, in my opinion, it should not be in stocks, period. The stock market grows over the long run, that’s why we invest in it. Long run…not short run.
Third, no one knows when this horrible market will end but we do know one thing: it will end. The average bear market (from top to bottom) lasts about 338 days. It might take less, it might take more, but that’s as good of a way as any to think about it.
For some strange reason humans crave complex answers to questions when we know deep down that the simple answer is almost always right (and easy to do).
If you need to lose weight the simple answer is burn more calories than you consume.
If you need to get a good grade on a test, study more.
The simplest advice for investing is this: be more patient. If the market is down for whatever reason, don’t cash in your losses to stop the mental anguish. Instead, be more patient, hold to the reason you are investing in the first place.
I know that’s little solace as you stare at losses worrying about the future. But guess what, 2009 Michael also stared at losses and worried about the future.
I’m not promising you’ll experience the same returns he did, I’m just telling a story from another difficult time (like now) and what I learned.
In the end, Michael of the past followed the simplest advice as the stock market came apart (as it has numerous times in history): be more patient.
And that made all the difference.