Sometimes a lack of creativity will steal over you, and your output will come to a halt. That’s what has happened to me over the past few weeks. We went back to the office, then we were traveling, then my whole family got COVID, then work got busy and I started studying for some regulatory exams. I started this newsletter as a pandemic project because I had all the time I wasn’t spending on a commute and the day-to-day office interactions to think more creatively and put my thoughts down in pixels. Certainly, the depressing state world affairs has played a role as well. It’s hard to think too hard about topics of personal finance when Ukrainians are being bombed out of their homes for no reason other than one madman’s caprice.
It finally starts to feel like the elevated valuations that have persisted for so long are starting to come back to earth. Inflation has picked up more dramatically than many people can remember. Stocks and bonds have experienced simultaneous declines. It’s a weird time for sure.
Year to date, the S&P 500 is down by over 16%. The Barclays Aggregate Bond Index is down over 9.5% YTD. Netflix is down 70%. Bitcoin is down 34%. So much for it being both an inflation hedge and an asset with low correlation to broader markets.
But a little perspective is in order. In the last five years, the S&P 500 is up 67%. The recent market turmoil is a natural and necessary occurrence. In order for forward return expectations to be positive, valuations must periodically be reevaluated by the market, and the exuberance that characterizes the latter stages of a cycle must be purged. The uses to which capital is allocated must be reevaluated. A Peloton (-63% YTD) isn’t revolutionary; it’s a stationary bike with an iPad attached to it. Uber (-46% YTD) doesn’t represent a sea change in how we get around; it’s a taxi company with an app that’s willing to ignore regulations.
Market downturns are where you’ll be reminded of the benefits of diversification and also be rewarded for sticking to your plan. You’ll be reminded of the benefits of holding some cash, even when you know that inflation is gnawing away at it with every successive CPI print. If you sell out in a downturn, you will make paper losses permanent. And the other things that downturns will do is to re-instill a sense of reality. Cashflow matters. Balance sheet health is a real thing. The largesse of Venture Capital firms in finding unprofitable enterprises can never last forever. These are the times that try men’s souls, but also when serious investors can make tactical decisions that result in real value over the long term.
I’m recommitting to this weekly newsletter. If there are topics that you want to see covered, drop a comment.
Your advice in a downturn/correction seems right to me. In the 2008-9 fiasco I sold nothing. In 2020 I sold a little for liquidity reasons, holding enough cash to live on for a year if we had to, since we were staring at a COVID crisis, a tipping point election, and war in Europe. I've since re-invested about half of that cash. In 2008 I only called my broker once announcing that I needed some "handholding." Emphatically and slowly that broker reminded, "You don't need the money" as a rationale against panic. The advice proved correct. I like your occasional columns, Anders.
Please keep writing, and do it frequently. You have a sensible POV that I like to share with others.