2022 started with the worst January for the US stock market since the last financial crisis in 2008, and it definitely set the investors and speculators jittered. With the fear of inflation and interest rate hike, the mainstream media made a U-turn from their optimism of the stock market just one month ago. Will the stock market crash further? Is the recession coming?
Every month, I document my thought about the market called Global Momentum Compass so I can share ideas, review and learn from my past success and mistakes. You can check out my past updates here.
First of all, the recent stock market crash was nothing but normal. If you look at the chart below, you will realize that 10% stock market correction is more common than most people think. It happens almost every year. So if someone talks about the recent correction as if the sky is falling, it is simply because they don’t have enough experience in the stock market.
2020 and 2021 were two crazy years and many new investors thought it was the norm. I encourage you to read my recent article about the stock market crash so you have a better understanding of this topic.
Additional Reading: Stock Market Crash: 3 things you can do now.
Two crazy years of investing
It took me a long time to think about what should be my investment strategy for 2022. After all, it was a crazy world to invest in the past 2 years.
- The US printed more money in one year than in the entire history.
- Companies that haven’t even earned money saw their stock prices soaring to the moon.
- It seems everybody has made millions through crypto and NFTs. After all, it is all over social media.
- China has “killed” all their own tech giants. And I really miss Jack Ma’s inspirational speech.
- The second-largest property developer in China, Evergrande, is on the verge of default. It seems Hui Ka Yan has to use his personal wealth (used to be $42 billion) to pay for the company’s debt.
- Oh, two of Richard Branson’s airlines, Virgin Australia and Virgin Atlantic Airways were already bankrupted, but the billionaire still hurtled into space with his own rocket ship this year.
The list goes on.
These things throw the things that we have learned in the finance textbook into the dust bin. I have been frequently asking myself if this is going to be the new norm or it is just a flash in financial history.
I think the question we need to ask ourselves is if the success of these strategies can be repeated in the long run.
I still remember when I showed the chart below in my Telegram Channel one year ago (Jan 2021) when the world was crazy about innovative technology stocks, I got a lot of unfriendly comments. Some say that because, I as a financial adviser, hasn’t figured out a way to make money out of this trend, thus I am discouraging investors from doing it.
Note these are the stocks that were “non-profitable”. I think the people who talked about “going to the moon” and “unstoppable trend” didn’t have enough experience to understand risks.
You may have heard Cathie Wood, the famous “female Warren Buffett”. She made her name by investing in innovative technology stocks during the Covid period. Her fund ARKK made 156% in 2020. That was mind-blowing for many investors. But the same strategy has lost 23.5% in 2021. But this loss is only in the calendar year. From the peak in Feb 2020, the strategy has already lost 50% of its value.
How about the other technology stocks? The up-to-date chart below speaks for itself.
I think if you were attracted to invest something just because it has made a lot of money in the recent years. This is going to be the consequence most of the time. Because these returns are achieved in a specific environment while all stars are aligned.
I think Bitcoin and other cryptocurrency investors can testify that too. You may see many people made money in this space, or even some of your past cryptocurrency purchase was doing very well. Only when you started investing more, do you start losing money.
“Diamond hand”, as people call it, refers to people buying into something and holding it no matter what happened and how much they lose. I think it only works if lucky is on your side. And I don’t want to trust my money with luck.
Back to the basics
So what is my conclusion? I think the order is being restored.
What do I mean by that?
We can think about the past 2 years are the so-called “wild wide west” after the United States civil war while cowboys and outlaws dominate the country.
But people won’t want to continue living in such an environment. In another word, the so-called disrupters today will be “disrupted”.
Covid may have disrupted our society’s natural progression. But if it is not healthy, society will correct it by itself. Think about it, if 20 years old kids can make millions by issuing or flipping NFTs, would you question if you are stupid by continuing working for your boss? If an internet influencer can generate more sales in a day than a shopping mall’s full-year sales, would people still be encouraged to run a real business?
Mr Lee Kuan Yew once commented that Lee Ka-Ching is a smart businessman and made a lot of money through speculating on the property, but he never created real value to the society. I fully agree with him!
China has already taken the steps to clamp down on cryptocurrency speculations and break up big conglomerates. The western world may not follow the same route due to the capitalist system, but the voice on the ground are becoming stronger.
Everybody wants to make quick money, but I haven’t seen any quick money scheme that lasts. If a person makes money in the stock market through speculation, it is my belief that they will lose the money back to the market the same way.
You can’t make money beyond your paradigm. If you are lucky enough to have it, life will find a way to take it back. – Ivan Guan
The ARKK fund was a perfect example. The strategy of the fund was to invest in companies with promising future growth. Nothing wrong. But if you use the same strategy to invest in 2020 and 2021, the difference in performance is heaven and earth.
What is my conclusion?
I think that the honeymoon for stock speculations are over. The market will refocus on the fundamentals of the economy and companies. Traditional under-invested stocks will start to shine when liquidity becomes more scarce.
Going back to the basics will ensure our long term investing success. It is often said that opportunities await those who are prepared. The recent stock market correction is a disaster to many but an opportunity if you understand how the financial market works.
If my analysis is correct, the value rotation is probably finally here.
But there is still a wildcard. If the Fed deems that the tapering is too detrimental to the stock market, they can pause it to just let the market catch up. Thus I think volatility will stay but profitable growth stocks may trade sideways.
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