Three investing lessons from 2022
If you’re anything like me, the Covid-years have thrown off your recollection of time. What state was the global economy in at the start of 2022? Was the UK in a lockdown or just anticipating one? Who was the prime minister? I recently retrieved my skiing jacket from the wardrobe and found a mask in the pocket. That means that this time last year we were still wearing masks. Seems odd.
In the post-Christmas news lull, I have enjoyed reviewing articles from late 2021 which predicted the outlook for the year just gone. Some were prescient (a post-lockdown surge in spending alongside choked-up supply chains will cause an inflationary surge that forces central banks to raise interest rates). Others wildly incorrect (Goldman Sachs predicted the S&P 500 would hit 5100 points).
With the benefit of hindsight, some of the carnage endured by the markets in the last twelve months feels frustratingly inevitable. At the end of 2021 inflation was already starting to pick up meaning central banks were bound to respond. Most investors knew that the economic environment was a major contributor to equity market strength and any change in circumstance would have a negative effect on companies with crazy valuations.
Other causes of the sell-off were harder to predict. In Yuval Noah Harari’s latest book, published in 2018 (a follow up to his hugely popular tomes Sapiens and Homo Deus), the historian reflects that Vladimir Putin would need to channel the maligned mentality of Stalin to send Russian troops marching towards Kyiv. But in February that’s just what he did, bringing about a crisis in the European energy market which contributed even more to inflation.
Then there was the mayhem in domestic politics. In January Boris Johnson’s post-Covid popularity was still ascending. By July he was out, paving the way for a mad autumn at Number 10, a return to austerity and frequent comments about a re-run of the ‘Winter of Discontent’. Meanwhile (whisper it), the UK’s distanced relationship with the EU has continued to provide problems for British businesses operating on the continent. Even the Brexit die-hards have been forced to retreat slightly from their view that exiting the EU would bring Britain nothing but opportunities.
And so with this reflective mindset I have jotted down a few thoughts on what 2022 has taught me as an investor.
1. Nothing lasts forever
Perhaps a bit of a downbeat note to begin with, but this lesson is actually one of optimism.
In late 2017, I wrote an article called ‘Crash Proof your Portfolio’. Why then? I can’t really remember, but I think I had spoken to several doomsters who enjoyed reminiscing about the pain of 2000 and 2008. I was an investment journalist covering the healthcare and tech sectors where valuations were exorbitant and I suppose I was scared.
But after writing the article I found myself seeing signs of an impending crash everywhere. I panicked and crash-proofed my own portfolio far too early, thus missing out on several years of growth.
A few years later I interviewed Carson Block, the famed short seller who has more reason to be hyper-sceptical than I do. But he too admitted that his negativity has meant he’s missed out on some major money-making opportunities - most notably in the wake of the Covid-19 crash.
Now that the markets truly have crashed, I am ruing the opportunities missed when they were good. Investing in equities is risky, but taking some risks is how we make money (within reason, but I will come onto that later).
And so, on the positive side, this bear market will also come to an end. There are many reasons to be pessimistic right now and 2023 is likely to bring more pain. But in the equity markets there are plenty of opportunities for investors with a long-term mindset. Take them while they are here, because they won’t last forever.
2. Be prepared for disappointment
That said, a bit of scepticism goes a long way.
In 2022, investors who prepared for a sell-off by keeping a little cash in their portfolio were those best placed to take advantage of the markets when they crashed. By liquidating some assets near the top they maybe didn’t make maximum returns in the good times, but they also weren’t forced sellers when the bad times hit.
Not many investors have avoided major losses in 2022, but the pain is undoubtedly slightly less for those who have already been able to take advantage of the opportunities that are emerging.
Emotionally, there is also a lot to be said for scepticism. All investors should have a ‘wet weather’ plan - one that is made when the skies are cloudless. It is easy to panic when things start to go wrong and that is when bad decisions are made and money is lost. By preparing for disappointment with a list of buying and selling criteria, investors can avoid making emotional decisions when the markets start to head south. Always fix the roof when the sun is shining.
3. Do your research
Warren Buffett’s first rule is “never lose money” (and second rule is to never forget rule one), but I think this over simplifies matters. The easiest way to not lose money is to not do anything with it, but Buffett doesn’t follow that advice, he invests his money. But he invests with enormous conviction.
In the era of cryptocurrencies, SPACS, automation and healthcare innovation there have been numerous opportunities for investors to make a lot of money, very quickly. The temptation to buy into these super-innovative industries has been high. But in 2022, many investors who gave into that temptation have been badly burned. They failed to stick to Buffett’s primary rule and have lost money, spectacularly.
The problem with a lot of these novel industries is that they are not easy to understand. They are so innovative that we don’t yet know the role that they will play in society or economy. Investors in cryptocurrencies (for example) can claim high conviction and they might be right. But how many of them can truly explain how bitcoin and its peers work and how they will be used in the future? Not that many.
To avoid losing money as an investor, it’s important to know your portfolio, understand how it’s constructed and have confidence based on your own research (not just what other people are saying).
With all that in mind, I am looking forward to investigating long-term investment opportunities both new and old in 2023, while trying to maintain some of the sense of calm and rationality that the post-Christmas lull has brought with it.
Happy New Year!
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I think Rich2104 that the issue is not 'protectionism' but we voted to make life more difficult for businesses - even the simple act of importing and exporting. Brexit is and always going to be a 10yr car crash and we're only in year 6 - the first time that i can remember that a country knowingly voted to impoverish itself.
It's fine to say 'get on with it' but as a Brit, that means that I have to 'get on with' a country going backwards (relatively speaking) and likely to continue doing so. In investment terms of course, that means looking elsewhere. (I saw today one paper saying that the UK markets are completing their move to emerging market status, which is somewhat thought-provoking.
I think that's the first time I've ever seen the B word on Stockopedia, significant by it's absence perhaps?
It's clear from where I'm sat that Brexit usually enters the conversation as a quick excuse that often deflects further scrutiny. I recall my partner grumbling about the plight of a client who's strawberry farm was threatened by their inability to recruit migrant workers due to post-Brexit uncertainty. My reaction; since when had it ever been considered economically viable to pay people to pick strawberries? In my 1980's childhood if we wanted strawbs that weren't imported we were dragged off to the local "Pick your own" farm, where you were let loose in the field with a basket, which was then weighed and charged accordingly. In my parents childhood working holidays were the norm in the sector, where whole families got free board and lodging in return for helping with the harvests.
Closer to home a local shop closed down with the shopkeeper quoted in our local paper (Never going to win any prizes for investigative journalism), saying it was due to Brexit costs. Interestingly the costs which her neighbours who I knew were complaining of were Business rates and compulsory BID premia, not Brexit and the intrepid journalist failed to ask how the shopkeeper thought she was could run a viable business selling 1940's themed cleaning products- yes really- when she charged more than three times as much for borax and bicarb as Wilko did...
Oddly Brexit has probably kept the exGM plants at Ellesmere Port and Luton in business as well as the BMW "MINI" plant at Cowley (Despite the loss of some product lines to Born and the ex Steyr-Daimler plant in Graz). As long as the United Kingdom and our Brussels brethren fail to see eye to eye then the spectre of a future trade war is kept alive and with it the threat of tariffs on imported vehicles. Overseas car makers need a beach-head so that they can assemble at least some of their vehicles in the United Kingdom if it turns ugly. If we'd voted remain BMW would have probably moved the "MINI" to Leipzig, Madras or Shenyang and GM would have probably closed all Vauxhall and Opel operations without a buyer.
Some good replies to my point, again I'd like to point out how great the tone is on this site. No mud slinging etc.
I think you miss the point of the working class vote. For many people from fishing communities to agricultural to factory workers and beyond. They are/were sick of seeing their jobs relocated to developing nations or worse fellow EU countries where funding was provided by the EU. My viewpoint is rather than moan we need to just factor this into our analysis when investing. Whether it's good or bad at times will be subjective in my opinion, brexit will allow some companies to thrive whilst crippling some at the opposite end of the spectrum that is.
Anyway, I wish everyone the very best of luck and a happy new year.
I had a pretty good year ending it up 116.5 percent(YTD) from a total of 200 trades(buys and sells). My trades dropped in the last 2 quarters as I got better at using Stockopedia(1 year now) and was more sure about the stocks I was holding so I held them longer. Going forward can probably reduce number of trades to half for the same performance, but goal is to aim for much higher performance - have just added US region, and hoping that's where I will get the extra performance from. The free stockopedia e-book was super helpful in getting started in the US market.... ebook https://www.stockopedia.com/bo...
Biggest lessons learnt is if you are going to invest hard earned cash into stocks, you need all the quality data and metrics you can get your hands on for every stock you own bar none, and you already have the means right here.
Happy New Year!
This is a great memo from Howard Marks and thanks for posting it here. It is an interesting challenge to consider the sea changes that our own sectors have experienced over a similar time frame. I have 40 years experience in agriculture and would say the two sea changes over that period have been joining the Common Agricultural Policy (CAP) and in the impact of Climate Change - where agriculture is both a source of emissions and a means to mitigate it. In addition to the financial sector change that Howard Marks elegantly describes, in the agricultural industry in the UK we need to contend with the end of CAP and the (likely) adoption of the Environmental Land Management Scheme (ELMS; and its equivalents in the devolved nations) as a direct consequence of the UK leaving the EU. In terms of food, like interest rates we are probably seeing a return to longer term averages, however this is at a time when many are struggling with the effects of inflation on their cost of living. An increase in agricultural input costs including for labour has not addressed the shortfall in European labour, and so UK food production (and therefore self-sufficiency) has been impacted. The response and trend is towards even greater robotisation of farming and food production. We are also seeing a tension about who owns those robots (and therefore their labour) the farmer or the robot company (or their financiers). There will be winners and losers as a result of leaving the EU but what is clear is that it has increased change and uncertainty at a time when both are increasing as a result of other external factors including climate change, inflation, technological innovation (AI etc) and geopolitical events. In terms of how to respond to all this change, in terms of investing, it has made me cautious and quite possibly over-diversified.
It’s quite easy to make high returns in various conditions, even donkey markets. Here’s just one (old) example I’ve read today.
John bought a donkey from a farmer for £100 and the farmer agreed to deliver the donkey the next day.
But the next day he drove up and said, ‘Sorry son, but I have some bad news. The donkey's died.'
John replied, ‘Well then just give me my money back.’
The farmer said, ‘I can't do that, I've already spent it.’
John said, ‘OK then, just bring me the donkey.’
The farmer asked, ‘What are you going to do with him?’ .
John said, 'I’m going to raffle him off.’
The farmer said, ‘You can't raffle a dead donkey.’
John said ‘Sure I can. Watch me. I just won't tell anybody he's dead.’
A month later, the farmer met up with John and asked ‘What happened with that dead donkey?’
John said, ‘I raffled him off. I sold 500 tickets at £2 apiece and made a profit of £898.’ The farmer said, ‘Didn't anyone complain?’
John said, ‘Just the guy who won. So I gave him his £2 back.’
Happy new year to all 8-)
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Yes, @swift1467. Unfortunately the working class blamed the wrong cause. They should have blamed a Government that prioritised the interests of the wealthy and their ageing voters over maintaining a fairer society. Austerity and the 'triple lock' were political choices and the current strikes are a direct consequence of the shocking decline in real wages. Without a fairer distribution of wealth, the UK cannot achieve higher productivity and decent public services and infrastructure.
I can't see how the necessary changes can happen quickly or without serious damage to the prices of bonds and equities, can you?
Well now that you mention it... in the beginning of the 2009 bull market I made around 2000 percent trading AIM energy stocks, but that was when I started my trading career and at that time I didn't understand risk properly so I didn't know how to keep those profits. It was all gambling back then, but i was lucky enough to be in right place at the right time- could have picked anything and it would have gone up. Much better understanding of risk now though and my charting skills are far more advanced. Long way to go to get back to where I want to be, but I've got the time. I wasnt so good on the fundmentals though and that was my weakness until my good friend Stockopedia came along.
I was trading mostly tips from Investor Chronicles back then, I got very lucky from catching some early on AIM oil and gas explorers, back then ten baggers were plentiful. It was such a gamble back then. My approach these days is far more structured and that's good, because I dont think my hair could handle that amount of stress again.
That's quite some performance this year guybrush. I managed +15% in my trading account (ig spreadbetting), but most of that in h1. H2 was a slog.
Could I ask if you have a stocko screen that you use, and if you have a set risk per trade? I typically risk 1% per trade, but may have several trades on at once.
I position size so that I risk no more than 2.5 percent of my total equity on any one trade. I.e if I spend 25 percent of my account on one stock with a maximum stop loss of10 percent on that trade( I usually will sell much sooner at 5 percent) , than total risk to my equity is 2.5 percent(or on average 1.2 percent). Of course, worst case scenario, gap risk could mean I am down 25 percent of total equity if the stock went to nil(stocks I choose are good so this woudn't happen), or if the stock had dropped 50 percent than I would have lost 12.5 percent of my total equity, but that is a good mathematical figure to lose as it close to the the 10 percent loss requiring a 11 percent gain to get back to even. I reduce gap risk by making sure the stock I chose is fundamentally sound(has plenty of cash and decent earnings) and the chart position is solid. As I get more funds, I would reduce the maximum spend per stock to no more than 10 percent of my account on any one stock. I may scale into the 25 percent(or later 10 percent) rather than buy it all at once. Basically, its the Miniervini and O'reilly method of risk, one which makes perfect mathematical sense. Minervinin prefers concentration of stocks rather than mass diversifation. Thats works for me too.
However, I'm not trading breakouts as both Miniervini and O'reilly do, but certain chart patterns instead, as breakouts in bear markets tend to be to the downside, instead of sitting out of the market, As for trading breakouts, I will wait for a bull market for that, and will focus on US markets also.I used compounding of my trades to get to the 100 percent plus profits. By that mean, I can make 25 percent profit on a trade only three times when reinvested to make close to 100 percent profit. Those 25 percent trades were easily achieved by looking for stocks that swung within a trading range of about that number(mini charts super useful here). Once I caught a stock that had dropped 50 percent than went back up same day or next day and i made a 50 percent profit (IOG). Plenty of trades I didnt make money, or took a sight loss, but I made big profits on the winners and small losses on the loosers. Maximum drawdown was 8 percent out of all of my trades for the year.
My screen is based on EPS growth rolling. EPS is a Minervini and O'relly key metric. I screen for stocks that have positive EPS growth in the next year, and than within that screen I look at the Stockreport's metrics and charts to narrrow down the list.
Still a lot to learn, but thats how i made the 117 percent profit in 2022. I personally don't think it was much, but I do appreciate many have lost, but that doesnt suprise me when many hold for ever, even in a bear market.
If anything has made me resolve to use Global Trackers in the future it is this dreadful litany of expenditure of such massive intellectual effort for so little reward….
The only benefit of brexit is that the ruling class cannot blame anything on the EU anymore (I am sure they will try).
Back in '10 our living standards were due to reach germany's by ~2030.
In 2022 our living standard are due to drop to poland's by ~2030 and slovenia has already passed us.
The problems I see are
- Government and the economy is too centralized in London
-Houses cost too much, we should have young people dreaming about founding a business, not being able to buy a tiny flat in 15y time
-Outside London, the standard of public transport is low to just not there, and expensive, this means that the right person just cannot get to the right job, reducing productivity
-Adult education, we have no natural resources other than people, we stop investing in people when they are ~21. That is weird.
None of these have anything to do with brexit.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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@Richi2014. No your not the only one, and you have absolutely nailed it with the working class. They were the ones doing the heavy lifting, taking the pain and having their wages driven down by cheap labour. Well said!