When we look back on this year, as every year, we have things we can and should learn. But let me submit for your consideration that there are some very tempting lessons that we should NOT learn from this year. Learning the wrong lessons will lead us astray. But it’s been such a painful year, it seems the only thing that would have “worked” would have been to NOT invest. Personally it’s been harder than ever to fight against that conclusion (which I know is false long term, and isn’t viable anyway) and to try to learn the right lessons. Here are some examples.
2022 observation #1: There are bad periods to invest in stocks.
In fact, it wasn’t just stocks. This was just a bad year to invest in most anything. Sure a few things did well: Oil stocks, some health care, a few other cyclicals like Caterpillar. But in general it was awful everywhere. And this isn’t a revelation. We all know that the stock market goes down sometimes. But this year we were reminded how it feels. And if we live long enough the market will remind us again – could even be in 2023! (I hope not)
Good lesson: I have to be prepared for this to happen at any point. For retired folks maybe that means taking some money out of the market in boom times, like Saul has mentioned doing more than once. For those still working, it probably means getting comfortable with portfolio setbacks, and knowing that if you continue to buy over time you’ll get money in at the highs but also at the lows.
Wrong lesson: “We should have seen this coming somehow and gone into oil stocks, or hidden our money under the mattress this year.” Looking back, this would have been a genius move. And a few people probably guessed right on some things to some extent. But that’s what these are: guesses. And what’s the guess now? Get back in? Wait until the market starts to go up and miss 25% of it? What looks clear in retrospect was never clear at the time.
2022 observation #2: Inflation and Interest rates make a huge difference.
Good lesson: Wow, macro is powerful. Inflation alone can lead to the series of events that we’ve seen this year (exacerbated by other things like war), and crush the market. …And in other times it can be a scary “thing” that doesn’t actually show up (sometimes like recently, for 40 years). We don’t know which time we’re living in until after it happens.
Wrong lesson: “We need to pay more attention to macro and try to react to it.” Look, I think we always need to be nimble. Heck, I’m holding more cash in the portfolio than usual. But not because I think I can time the market. It’s partially for mental health and security, and it’s partially because of a lack of companies that I love right now. If we try to become macro analysts, my belief is, we’ll drive ourselves crazy and we will find more false positives than actual positives. Because the entire time I’ve been investing, even the most boom times, there has never been a time when there’s nothing we can find to worry about. (hat tip to Peter Lynch for that thought)
2022 observation #3: SaaS was absolutely demolished this year.
Good lesson: There are no magic beans. Sure, SaaS is a fantastic business model, but it’s not a panacea. We knew everything got ahead of itself in 2021. Now valuations have swung back down. Also, the companies aren’t doing as well in this economy as they have in past years. But all the great things about SaaS still exist. Great gross margins, easy path to profitability if managed well, NRR, land and expand…and most importantly subscriptions which mean not having to start from scratch every quarter.
Wrong lesson: “We picked the wrong stocks.” I just don’t buy that. At all. Freaking Google (Alphabet) is down almost 40% this year. Amazon is down 50%. Facebook (Meta) and Tesla are down more than Datadog, BILL, or Snowflake. I’m not just picking random companies – at the start of 2022, those four giants and Apple and Microsoft (also both down 25-30% this year) were the top 6 companies in the world. When the world’s largest companies can fall 50%+…a couple of them close to 70%…I don’t know that I’ve ever seen that in a single year. Maybe the big banks in 2008, but not companies like these that are for the most part doing business as usual. I don’t follow too closely, but I’m pretty sure these companies are fine (certainly Amazon for crying out loud), and I’m very confident our companies are too. It has just been a combination of starting from a valuation mountaintop, and then a year of Murphy’s law.
It’s difficult to believe the “right” lessons, and to reject the “wrong” lessons. That’s one reason I wanted to type them out. I’m as guilty as anyone of being dejected lately, and of reacting – the impulse is to withdraw and go hide. But reflection reminds me: surviving down markets is integral to being an investor: we just have to have a plan that includes being prepared for these times.
Any thoughts? What other observations or reminders has 2022 brought? And what’s the right lesson to learn?