I have a confession to make, DYD team. Although embarrassing to admit, as a recent graduate (four days ago) with a newly minted degree in Economics & Finance, I have to get this off my chest before I can - in good faith - embark on a career of managing other people’s money. In 2020 / 2021, there was a brief period where I legitimately believed the U.S. economy might not ever experience a recession again.
Let the roasting begin.
Obviously, that take was about as cold as Max Kellerman’s 2016 claim that Tom Brady “is going to be a bum in short order.” Now, we find ourselves in a world where TB12 has racked up 3 more rings while the U.S. economy is almost undoubtedly receding already with more pain to come. Welcome to the Cold Takes Club, with Max & Markets.
But even still, don’t get all ‘doom and gloom’ on me now. To give us some comfort in these trying times, let’s check the stats. This table below, although brief, sums up numerically the essence of today’s post:
What we observe here is the importance of perspective. It’s been a long, arduous 5-months of CNBC and Bloomberg constantly reminding us that the market, much like Ke$ha, is going down and yelling timber. In the grand scheme of things, 5-months isn’t an enormously long time at all, but living through it is a whole different story.
And to be frank, this downturn in both markets and the economy has been maybe the most anticipated on record. Since the start of COVID, everyone knew high-growth tech stocks were forming a massive bubble. Further, we were all well aware that the money printer along with things like supply-demand imbalances in the labor market would drive wage-push inflation. Of course, hindsight is 20/20, but all the signs were there; Nassim Taleb would tell you this was no black swan event.
What wasn’t obvious (and still definitely isn’t) is timing. A rule of thumb in investing is that markets tend to bottom 6-9 months prior to the deepest depths of any given recession. Not sure where that “rule” of thumb came from, but a quick Google search confirms that the investing world pretty much just agrees that this is true. I mean, markets are a leading indicator, and 6-9 months sounds legit, so why not…right?
If you subscribe to the above belief and hold the opinion that markets are bottoming out as we speak, implicit in that take is the view that the worst of the U.S. recession is to come between November ‘22 and February ‘23. It’s fine to think that, but putting even the slightest degree of certainty behind that view is absurd.
What we’re dealing with here boils down to two things: probabilities & perspectives.
Yesterday, my university (wait, is it my alma mater now?) hosted a “Fireside Chat” with the legendary Peter Lynch. As in his books, Mr. Lynch harped on the need to keep things simple, saying that the greatest mistake many rookie traders and investors make is overcomplicating their thought process. Lynch’s “Two-Minute Stock Pitch” idea was brought up several times, along with sentiments like “wow, this hotel chain is busy and has lower operating costs than competitors. Let’s check out the stock” - both concrete examples of exactly how to keep things simple.
And in large part, it was that conversation that inspired today’s post. During a bear or down-trending market, it’s all too easy to drown yourself in obscure facts and figures to support whatever pre-existing thesis you held. Realistically, unless you’re a L/S hedge fund manager or Peter Schiff or something, there are much more important themes to consider. One was detailed in the chart above, but other tidbits to keep in mind during these trying times include:
2019, ‘20, and ‘21 all saw ~20% gains in the S&P (2-3x the 7-9% average)
In the past 95 years, only 6 have seen annual returns worse than -20%
20 of those years have seen annual returns worse than -10%
If 2022 ended today, it would be the 7th worst performance in a calendar year since the Great Depression
Only 4 times has the S&P 500 had back-to-back down years
*Great Depression saw 4 down years in a row
*2000-2002 were 3 consecutive down years
When in doubt, consult with Bob
Hopefully, that provides the perspective we all need to survive Bear Market ‘22 in the best way possible. But, when it comes to the probability side of the coin, that’s all up to you.
There are a few different ways to think about this, but it’s crucial to consider the fact that the probability of success in your investment strategy is directly linked to your perspective. Right now, despite my portfolio performing worse than Tiger in the PGA Championship last Saturday, I feel like the luckiest investor in America. That’s because the probability of strong, long-term market performance - combined with my perspective and 50+ years of time in the market remaining - tell me that this downturn is nothing but good for investors like me.
As a result, I’m buying. You could show me 1,000 indicators, charts, and prophecies that we’re far from the market bottom and I would not care, nor should others among my investing peer group. The simple fact is there are a plethora of strong companies with unbelievable management teams, healthy cash flows, and large addressable markets that have recently begun trading at hefty discounts. Whether it’s the bottom or not, I’ll take that deal every time.
In the interest of transparency (and to give you content to roast me with in the future), some moves I’ve made recently include:
Entering: $NVDA, $ABNB, $SPOT, $BABA, $SNOW, and $TGT
Increasing: $PYPL and $SOFI
And some moves I’d love to make (if can scrounge up the capital) include:
Strongly Considering Entering: $CRWD, $SHOP, $SLNH, $ITI, and $POTX
Now we reach the point where I’ve re-read this post and can only think “wow, I really hope I don’t regret every word of this a year from now.” That’s certainly a possibility, but from where I sit now, I can’t imagine that I’ll regret these investing decisions 3, 5, or 10 years from now. To quote the great American philosophy group, the Zac Brown Band, “I’m in it for the long haul.”
So what do you think? Are you buying, selling, going to cash, or contemplating a career change? Why or why not? Let us know below, and as always, tell me where I’m wrong!
- Markets Aurelius
A Bullish Downturn
"The simple fact is there are a plethora of strong companies with unbelievable management teams, healthy cash flows, and large addressable markets that have recently begun trading at hefty discounts. "
Have you considered explaining
1) why you think they trade at a discount
2) why you think management teams are good?
3) healthy cash flows? I am pretty certain half those companies you are buying do NOT have healthy cash flows
This article is essentially saying on a long enough time horizon you can buy growth stocks and it will work out for you. that is not true. I'd bet a couple of the companies you mentioned won't even be around for you to realize the returns you are expecting, and decent returns on the others may very well not be realized for years and years, meanwhile your capital is stuck