The 1 essential thing I learnt is that the stock market is the greatest tool to build wealth, only if you’re patient.
In such volatile times, I know you would have heard “wise” sayings like cut your small losses before they became big losses. Easier said than done. Ask Ackman. Unless fundamentals change, selling at a loss means you do not have conviction in your picks in the first place. If that’s the case, you are not investing but gambling.
In my opinion, doing nothing for now is probably the right move. Assess your available remaining war chest to see if you have more money to buy solid, economy defining stocks at a fraction of their price they once were and build your retirement portfolio. Downward pressure in the market will not last forever. In the end, stocks of financially healthy companies will prevail. They always have and will.
As long as you’re patient and investing in solid companies with healthy balance sheets poised for future growth (even if growth slows in 2022), you’ll be fine.
The market is forward looking. Once it gets a grip on where the Fed wants to take rates (likely around 2% by year-end with 50bps the first 2 rate hikes and 25bps thereafter). They will then continue to monitor if inflation is going down from CPI data before hiking more.
I do not know if inflation will ever go down. But the odds are we are here at the peak of inflation currently. I feel the economy will slow down substantially simply as a result of high oil and food prices. People will have to reallocate their spending on these essential items.
Covid for the majority of the world except China has pretty much subsided. People has started to travel and spend money. However, if recession hits, consumer spending decreases, inflation will also decrease.
Prices of goods only go up if people are willing to pay them. Once people stop paying sky high prices for assets and commodities, prices will come back down. I think this will happen relatively soon.
People are not willing to pay high multiples of companies due to expectations of slower growth in the future. Any slowdown in future growth in a company’s quarterly earnings will drive the stock price down. This is probably a good time to reassess your portfolio on their long term sustainability instead of just looking at 2022 earning performances.
What is the Fed doing?
The Fed technically hasn’t even done anything besides ‘threatening’ to raise rates so far. But a hawkish Fed (an aggressive rate hike minded Fed) is spooking the market. If they hike rates too aggressively and slow down the economy too much, then we’ll have a recession (albeit a short one in my opinion, but inflation would cease to exist pretty much instantly going this route).
So far all we have endured is a 25bps hike. With the current Fed rate at 0.25%. Likely to go up to 0.75% on Tuesday, May 3rd. But if they say they want to tighten rates more aggressively than 50bps, the market will naturally have a huge negative reaction because a future priced market does not like slow growth. However this will end inflation much sooner, so the market can go back to normal once the dust settles.
Again, all the Fed has done so far is mostly talk. They haven’t really taken much action yet as far as tightening goes. I’d say the market is currently pricing in Fed rates of around 3% which is taking us well into 2023. Which means by 2023 the market will start pricing in growth for 2024. This is when I think the growth will resume its bullish trajectory. Until then we are likely to remain volatile.
Nobody knows Anything
If you browse the internet forums long enough, you’ll realize that nobody knows anything. Me included.
I started following Reddit during the GME squeeze. I never followed the ride but I just found it fascinating. As many have noticed, over the last few months, these Reddit favorite stocks has been diving down. I don’t know if it’s coincidence but it’s amazing how wrong Reddit is nowadays. Similar to Jim Cramer’s picks.
You See What You Want to See
Spending too much time in forums and social media can convince you that “everyone agrees” what you are doing is right and a few days later, “everyone agrees” it was an obvious poor move. When doing research, we tend to find similar views, views that agree on our outlook instead of contrarian opinions. This is dangerous as you are only building a one-sided case for your stock picks.
There are many good examples of stocks that fell out of popularity (not just speculative companies, blue chips too). As they fell in price, the overwhelming consensus was to scoop it up or more commonly known as “buy the f’cking dip”. But as they kept falling for a long period of time, the overwhelming consensus is that these were still “way overvalued” and everyone should wait for another 20-30% drop. Perhaps it is only during this time that we really bought the dip.
When They Zig, You Zag
That’s probably the best way to describe my investing style. I have been secretly using what I call the “father-in-law” indicator. How it works is that I would just do the opposite that my “father-in-law” would recommend. “Buy Gold”, “Time to buy some cryptos”, “China stocks are good for the long term”.. these famous last words are signals for me to avoid these sectors. So far it’s working for me beautifully.
Right now, the overwhelming consensus is that the market will only continue to tank over the months ahead and just keep throwing money in all the way down. If there was “so much certainty” the right move would be to liquidate everything and buy many months from now. A month later, the sentiment could completely change and you’d have made a “very poor decision” trying to time the market.
I don’t have a concise point here, I just want to point out that when it seems majority agrees on something related to stocks, it’s about the time to start betting against it. I’m not saying the market will go up or down from here next week. I’m just reminding everyone to not be so certain of anything just because there seems to be so much agreement. Panic sellers 4 weeks ago were geniuses in hindsight but panic selling is statistically a really bad move.
Another observation I made is that whenever everyone starts making fun of Warren Buffett, sell everything.
What Do We Do Now?
This bubble is either going to pop, or it isn’t. You can win either way.
There’s a lot of people anxious about what’s going to happen the next few weeks / months / years. Inflations running hot, feds increasing rates, economy shrunk last quarter, war in Russia, we just got out of a pandemic, etc etc.
The US Fed has demonstrated it isn’t interested in regulating big money. That’s how they got the money printer on in the first place. Now we’re getting small incremental rate increases that most likely won’t go high enough to actually do anything about inflation. Meaning the solid companies you are invested in are going to start going back up at some point.
If you have built a war chest of funds to be investing anymore into the market, then no matter what happens going forward, you’re have a high chance of succeeding.
I was around for some of the crash in the past few years and ever since I feel the market will crash every other month. Investing this way will get you nowhere. By nature we are more emotional about our losses than we are about our wins.
All that being said, maybe I’m just speaking to myself, and that’s ok too.
TLDR: Long story short, be patient. Do not stress over what you cannot control. Let the Fed do their job and you do yours. Earn money. Control the budget and buy the dip if you have the means to do so. Real wealth is built during markets like this. Once the bull market resumes, make sure you are on the train.