At the end of 2021 I wrote a piece entitled ‘Raising the Caution Flag’ If you haven’t read it, take some time. It’s worth looking into the psychology of investors when it comes to markets. I’d love to have gleaned some great insight into the macro picture coming into 2022 however my observation regarding concern over the market had more to do with investor complacency. After more than a decade run in the bull market folks who had been gun-shy for several years were now ready to take more risk. In fact, the number one question I got near the end of 2021 was ‘Should we take more risk?’ To which I would always answer “Why now?” I knew the answer of course, in that investors ‘felt’ better since returns had been so solid and so consistent. They had a newfound confidence that this mood was now here to say, completely disregarding the fact that it had in fact been that way for more than a decade already. My answer was a simple, yet an emphatic ‘NO’ and it led to the piece I wrote discussing our views of caution coming into this year.

 

Fast forward 11 months and an S&P that has at one time been off more than 20% and a NASDAQ off 30%. Many individual companies are down more than 50, 60 and even 70%. The tide has shifted and finally after so many years we’re starting to see value again and opportunity we haven’t seen in some time. I’m now discussing the same subject matter with folks and what do you think the conversation entails? Do you think folks are asking about taking more risk now that equity prices and bonds are down to historic levels? Do you think that since the traditional 60/40 portfolio has had its worst year in nearly a century, investors are clamoring to put money to work and take advantage of this? We all know the answer.

 

Ironically, fast forward a year after having conversations about taking more risk I am now having daily conversations about reducing risk or getting out altogether. Why would anyone be interesting in buying high, and selling low? Isn’t that the exact opposite of what we’re supposed to be doing?

 

Over the last 2 years, I have had the privilege of working extremely close with Logan who will eventually work closely with Daniel in running the day-to-day operations of the firm. This has been an organic process in that I didn’t develop any literature regarding this but rather have simply taken time after every meeting, every call, or weekly market recap to discuss at length key learning points. It’s safe to say we’ve spent more time discussing investor psychology than anything. I believe he is learning quickly that one of our primary roles is to work very hard to remain disciplined and unemotional regardless of what the market, economy, or media may throw at us. Staying sane in an insane world is half the battle.

 

More than a year ago I carved out an hour to cut a video on risk explaining and breaking down Standard Deviation . I did this as I was well aware that we were coming into a time when it would be warranted in that the bull market would not be going up forever. I also did this so that folks would be prepared to be opportunistic when opportunities presented themselves rather than fearful and emotional.

 

Markets are working hard to find a bottom. The Dow now advanced nearly 4,000 points off the lows of October and stand a spitting distance below all-time highs. While I have no idea what will happen in the coming weeks or months one thing, I am confident of, eventually markets will improve for more than a few weeks. In fact, odds favor that new highs will also eventually transpire and for a while many will not believe it until it keeps going and going leaving the naysayers behind. Only then will I begin to hear from people who want back in when in reality they should have been looking long before then.

 

I’ve seen this play out many, many times in my 20+ years of this business and I suspect it will continue to play out as long as there are markets to invest in. Please be careful not to fall prey to this emotional back and forth. Not only is it detrimental for your returns but it is not good for your mental health either.