This being the final week of 2021 most business papers, news agencies and bloggers like to reflect on the year that was. OK, I’ll bite.
If you stayed true to your investment needs and stayed in the market, you did just fine. If you kept yourself and your family safe over the course of the year, you hit a home run. Whew! There is my recap.
Seriously. I am not going to go over the ups and downs of this year. You want that, watch Robin Roberts tonight on ABC and get your recap. That should about cover it.
What I would like to do is recap my trading strategy and how it failed me. Yes. It failed me because I believed in what I have always known to be reliable. My K.I.S.S. strategy worked in 2020 to the tune of a 38% gain and I figured what worked during a horrific year should work during what one would think would be a much better year.
Well, at this writing, I am up 12%. Not a horrible performance in any other year but if I were a true portfolio manager I would have some explaining to do. Forget that I blew the doors off last year, you are truly only as good as your last trade in this business and since I can’t fire myself, the next best thing is admitting I got it wrong. Partially.
I use three things in my investment model. 1. Fundamentals. What does a company do? Is it managed well? What do its short term, mid term and long term prospects look like. 2. Technicals. This is my entry and exit point strategy. Discipline is key here and staying your course. 3. Intangibles. Simply put, what do I feel about the company, it’s stock and the overall market at any given time. This is from experience and a little bit of ego as well.
2021, like 2020, did not hold to form as far as the economy or the market. Markets continued to appear as if there was some disconnect and I did not fall for it in 2020 but I did in 2021. I will explain. Several times this year if you will recall, I called for a market correction. Each time I called for that correction, I lightened up on all of my positions. Lightened up so much that by late October, I was 85% in cash and other fixed assets. The Santa Claus rally that eventually came, happened without my participation. Thats the short story and while I did pick a winner( The Energy sector) and got out with a hefty profit. I also got killed in some other areas so my genius was mitigated by my stupidity.
2021 saw a market continue to rally with very few major bumps and one rule some investors use is “Ride the wave until it breaks” and that apparently is what most fund managers did. Having a stock in your portfolio that is up 60% YTD to me would be a sure sell signal. Take the profits and look for something else. The highly successful managers this year did not do that. They are riding these stocks until Hell freezes over and it’s worked. Although, the cream of the investment crop is getting smaller and smaller as we reach new heights, PM’s are sticking with what has worked so far.
I am going to digress for a minute and explain a phenomena that has been in place for a minimum of five years and it has become something of a backstop for the equity markets. While you read about the fact that individual investors account for only 14% of the money invested in stocks, you have to realize that that number goes up to around 73-75% when taken into account the mutual funds, IRA’s, Pension plans, Employee stock ownership plans. America is invested in stocks, make no mistake. Maybe not directly like in the 70’s but most Americans retirement money has an equity component. With that in mind, with each paycheck, billions of dollars get put into the market. Regardless of where the markets are. All time highs, people are investing. market meltdowns, people are investing. Even during recessions, money is being put to work in some sort of investment program. It is the backbone of US equity markets and will continue to be for the foreseeable future. This consistent influx of money will always protect the downside to some extent. The volatility in the equity market is not driven by this money. The hedge funds, individual day traders, active portfolio managers and quant trading operations drive these moves, but over time, markets are going to be exactly where they are supposed to be. The steady as she goes investors do not care (or should not care) about these 3% swings on a daily basis or the 10-15% pullbacks, because they are in it for the long term. It is the purest form of dollar cost averaging.
Back to the end of 2021. We are seeing that divergence that is typical of a pricey market. Certain tech stocks continue to climb while some of the lesser stocks in any of the indexes seem to be maintaining their gains but not adding to them. That separation is a better signal than any other regarding a top. Every major top in the last 50 years or so has had that same signal. in the 70’s and 80’s it wasn’t tech, it was manufacturing and oil. In the 90’s we saw the tech bubble burst and the good tech names survived. In the early part of this century it was financials that separated themselves and you know what happened there.
Are we in that 2008 space again some may ask. I don’t think so. I do think many lessons were learned and investors have spotted the company’s whose bubble will burst and headed towards the hills (or Apple or Alphabet). The fact still remains we are entering 2022 with records being set on NASDAQ and the S&P and those indexes are heavily weighted towards the biggest names and those big names have taken an outsized position as far as the indices go.
“It’s about the economy, stupid”. I hear that now and again and maybe it truly is. I misjudged the resilience of the US economy this year and missed a bit of the continuing upward momentum. Stupid me. I also believed that inflation, rising interest rates, Fed reducing its participation in money supply manipulation and an incredibly expensive Build Back Better program would cause the economy in the second quarter of 2022 to slow to nominal or sub nominal growth. I still believe it but if you dig down into what I mentioned, maybe it won’t be so bad.
Let’s go through my fears for 2022.
Inflation, I still believe it is a longer term issue and the rarity of what I explained a few weeks ago, being that prices are leading inflation and wages are trying to catch up, whereas most inflationary cycles start with wage inflation and then price rises, makes this inflationary cycle hard to wrap your arms around. It is here, we have to deal with it and hopefully, monetary policy won’t extend it longer than it’s natural course.
The Fed and its policies seem to always come after the damage is done and that is simply because they look at the World from data sets instead of having people on the ground advising them. The bond repurchase program should have ended in the beginning of 2021. The US Government put trillions of dollars into the system and there really was no need for any of these bond repurchases. That was for the banks and no one else. Now, they are late to the party on inflation and maybe, just maybe, they will be correct in limiting the size of the interest rate increases and it will have a limited effect on corporations bottom lines.
Lastly, I have a feeling that the BBB program will get passed in a much smaller state. It will create some problems with money supply, taxes will be an issue as well, not to mention the amount of debt the government has taken on. If it does get passed, two things will happen, one, inflation will still be here in a fairly meaningful way. Two, the economic numbers will continue to look very good for the administration going into the Midterms. Funny how that happens huh?
What does all this mean for you and for me? I still think there needs to be some sort of overall correction. Get stock prices more in line with economic realities. The economy should continue to recover in 2022 and that will help equity prices overall at the end of the day. You invest for short term gains and trading opportunities, stay alert because like every year, there will be hundreds of chances to make money. If you look long term, stay the course. A well balanced mix of quality names, mixed in with some solid fixed income should do just fine. For those of you who want to gamble, keep your eyes and ears open for those opportunities that others may shun. NFT’s, Ethereum, Dutch Tulip bulbs and of course, Disney animation stills.
Here’s to 2021. We won’t miss you all that much and we hope that 2022 will be a better year for all of us. It will always be more about staying healthy, staying safe and staying ahead.
Thank you for reading and responding to my Substacks over this year. I hope you enjoyed what I have written and while I may not be on the same page as a lot of you, I believe we all can share our thoughts and we all can listen and learn. I know I have.
2021...What Can You Say
I grew up with “It’s about the economy, stupid”. Well, the election of 2020 proved that statement wrong. Excellent article, remember, taking profits guarantee portfolio safety at our age;) Hopefully we get the "health issues" sorted out in 2022, Happy New Years to You!