The first half of this year was undoubtedly tough on many portfolios, although recent action continues to build evidence that the worst may be behind us. But don’t get too down on yourself if your portfolio performance was underwhelming to start 2022. Plenty of “smart money” hedge funds and investors were also caught flat-footed when the growth stock correction began at the end of last year.
The ARK Innovation ETF (ARKK) was one of many thematic investment ETFs and growth-focused funds to experience significant losses due to its massive exposure to growth investments.
Even Warren Buffett’s Berkshire Hathaway experienced a loss of nearly $50 billion in its equity portfolio for the quarter despite other aspects of the portfolio businesses continuing to run smoothly. So, if you got caught in the bear market, you’re in good company at least.
If recent action has left a bearish taste in your mouth, I’d preach patience instead of moving to cash at these levels. You see, despite the headlines, corporations remain fairly bullish on themselves and share buybacks are projected to reach their highest level ever in 2022.
If corporations are still bullish, why aren’t you? $1 trillion in corporate share buybacks are forecast for this year.
And share buybacks are a huge driver of stock demand as companies step up and buy their own stock off the open market.
So, yes, it’s been a rocky start to 2022, but abandoning investments is never a sound strategy – instead, look to accumulate high-quality companies at a discount and continue to invest in American prosperity through low-cost S&P 500 ETFs.
It is a tale as old as time. Many so-called experts would tell you the U.S. is already in a mild recession. But recessions are among the best times to buy assets – wealthy investors step in when everyone is running for the exits. In fact, investors like Stanley Drunkenmiller almost exclusively look at the flow of money in the economy to dictate investment decisions, preferring to invest when the Fed is accommodative and asset prices are low.
That is exactly the environment we were in during 2020-2021, coming out of the covid pandemic.
So, when the tables turned, it was a brutal repricing event. But remember, the federal reserve must raise interest rates in order to inevitably use the only tool at their disposal when things turn south – the ability to cut the interest rate. Ironic.
If interest rates always remained low, that would be unhealthy for the economy.
Looking Forward
Investing is about the future, not today. This is a contrarian idea that can be difficult to grasp, but it’s the core tenet that corporations embrace when pursuing share buybacks.
Yes, prices are impacted today based on sentiment and fear. But selling Amazon (AMZN) stock in 2000 at a loss because it seemed like the right decision is tough to stomach in hindsight.
Instead, it is better to follow the same strategy in both bull and bear markets.
Here are a few things to keep in mind:
- Invest for the long run in companies that you can understand how they make money; otherwise, stick to the indexes
- Create a selling strategy. Everyone talks about buying stocks, but when do you sell? Simplify your approach and take modest profits during periods when stock prices appreciate and treat it like a dividend to reinvest in the future – this helps form discipline when stocks are rising
- Wade in and out of positions instead of purchasing all at once
- Determine a loss you’re willing to accept and set limits, this removes emotion from the equation
- Compare a stock with its closest competitors using tools made available by your broker. Ask yourself simple questions like, what are the company’s margins? Is the company growing or stagnant? Who are their customers?
- Ask yourself, what is the catalyst for the company to gain value? Why is this company around today and why will it be needed in the future?
- Consider selling covered calls on stocks you own and puts on stocks you would like to own
- Avoid cyclical, consumer-facing businesses that only do well during periods of excitement
- Avoid commoditized businesses that have exposure to specific input costs to generate widgets
- Check LinkedIn and see if they are growing their headcount or if they’re quick to lay off employees (treating people right is a good indicator of long-term success)
You should only sell stock in companies if:
- The long-term durability of the business fundamentally changes
- A better investment opportunity arises
If you sell everything today and become too enamored with inflation headlines and one quarterly earnings report that missed by .2% you will regret, it. American companies are the best companies in the world to invest in, and share buybacks are how companies invest in themselves. Find a few winners or take the S&P 500, rain or shine, to compound wealth in any environment.