Back To Normal
No matter what the media blowhards say, markets are not acting abnormally. Granted, every market cycle is different to some extent but if you look at the larger picture and think about past cycles, they all are pretty much the same.
The media’s job is to excite and entice and without all of those geniuses that come out of the woodwork to tell you how smart they are, the media would be stuck reporting on the same cycle as the last cycle and the next cycle will be the same as this one.
It’s how business reporting works. There really isn’t anything new in the world of finance and investing. You have cycles were earnings are increasing. You have cycles where earnings are decreasing. Finally, you have cycles where literally nothing is happening.
Investing is predicated on the belief that you are at the beginning of whichever cycle we are in. Macro investing, as well as micro investing is just a repeat of what happened at some other period in time.
Yes, investing during the pandemic was unique and at the start was complicated by the unknown. That was the beginning of an up cycle, just like during the beginning of 2009 after the financial crisis. The unknown was stronger than the known and markets reflected that. It always ends though.
The point of investing is to either catch the cycle at its beginning or stay invested and ride out the inevitable up and down cycles.
No matter what any of the talking heads that come on CNBC, Bloomberg or Fox Business Channel say, they haven’t got a clue. No one really does.
They form educated opinions and use statistics and facts and the really good ones, look to the past but the reality is, you really don’t know. The variables that are understood play out a certain way but like life, there are always other variables that can play out positively or negatively. There isn’t anyone yet who has accurately predicted those variables consistently over time.
To put it bluntly, investing is a civilized, regulated form of gambling. You buy a stock at a certain price and the hope is over a defined period of time, that stock appreciates in value more than inflation and more than the current yield on a safer investment. There are a lot of tools to try and help you make an informed decision but the reality is, an unforeseen event can knock even the best thought out investment plan on its ear.
That is the main point here: The unforeseen is to be expected and should be part of your investment criteria.
Abnormal behavior or events are actually the normal because very few things in life are a straight line. That abnormal behavior should be factored into every major event be it financial, societal or anything else.
Unfortunately, for me, I like simple, and simple does not exist in an abnormal situation so I have become a firm believer of investing for the longer term. Every investment will have an abnormal period (Financial Crisises, War, Pandemics) and to react harshly to those abnormal periods has been proven to be foolish. Stay the course and changes in investments should be made after careful consideration about the model that investment thrived in before the abnormal happened.
We are coming out of a true global crisis and at the beginning of this crisis there were investments that made total sense. Peloton for example. The Peloton cycle is a very unique piece of equipment. It melds social interaction (with no chance of catching Covid) with a fairly good workout. Something millions of people bit into. The stock soared but it was soaring during an abnormal event and as you well know, those events only have a limited lifespan. The lifespan was 16 months and then orders stopped and people were trying to return those expensive drying racks that were sitting unused in their apartments and family rooms. The abnormal became normal and the stock cratered.
We are going back to normal and that is the whole point. Companies will not have the Covid excuse or the supply chain excuse for much longer. Their sales may be up but their margins are shrinking. Yes, we are in an inflationary environment but it really isn’t that much different than past inflationary environments.
Yes, there are a couple of wildcards in the near term but nothing surprising. The Fed may raise interests by 75 basis points. Ok, no surprise there. It could do less or a little more but it is not out of the norm of what the Fed should be doing. There is a divergence in some of the economic numbers which has led to some confusion as to where we are actually going over the next six to twelve months but it’s not like we haven’t had diverging situations before (Think of March/April of 2020. The World was shutting down and equity markets were rallying out of that Covid Crash).
To sum it up: Abnormal events are all par for the course in a normal environment. You can try and time these events for better returns but that usually is a fools game. The investment decisions you make should be predicated on where a company is going in normal times because the abnormal will always be there and it is unpredictable.