If the year were to end today, 2022 would rank as the 7th worst calendar year return for the stock market since the Great Depression. Despite there is still plenty of time left before the year is over, there’s no denying that this has been a terrible year in the stock market to date, especially for new investors.

The financial markets are struggling to find confidence as the world is still dealing with high inflation, the Russia-Ukraine war, post-pandemic, labour shortages, supply chain issues, Fed tightening, rising interest rates, and more.

Investment opportunities never feel comfortable at the time of investment. Anything can happen for the remainder of 2022. But the good news is that there is no news for the past month. It means whatever bad economic scenarios have already been priced at the current market prices.

As someone who has managed investors’ money for many years, I know the concern to many investors is not the drop in the portfolio value, but how long it lasts. Rationally speaking, the portfolio is reasonable resilient in the current market scenario and positioned well for the recovery. But our human minds are not designed to endure temporary loss in any period. Why?

A consumer’s mind

The reason that is so painful to deal with loss is that most people invest with a consumer’s mind, thus it is normal to seek instant gratification. A consumer’s mind means that when you make a purchase, you want to see instant results. For example, if you are thirsty, you go to a store, pick up a coca-cola, pay the money and you can enjoy your drink.

But if you were to translate this to investing, it means you have to buy an investment at the exact bottom every single time, which is not possible.

In reality, investing is like eating at a conveyor belt sushi restaurant. There are a few rules you have to follow:

• When you see something, the next moment, it moves.
• You can pick up whichever plate based on what seems nice, but you can’t put it back.
• If you pick up something delicious, good for you. If it sucks, you still have to pay for it.
• You can see a good plate coming, but if you are slow in action, it is taken by another person.
• If you regret that you didn’t take that plate you wanted. Too bad, it is gone.

In summary, you can only make your best decision based on today’s information, but you don’t know what plate is turning around from the corner.

The financial markets can be moved by many factors: a political move or policy change by the central government, a natural disaster or an accident (like the recent US gas export ban triggered by an explosion at a Texas liquefied natural gas plant). Everything is intertwined and affects each other. If we can accept this reality, the best way to deal with it is to stick with the secular trends.

Secular trends

As an investor, we need to look for trends that are so big that most factors can only cause detours but not alter the course of the direction. So what are the big trends now?

• Inflation – As I explained in my past article, the cause of inflation is man-made. The world is moving toward deglobalization which will inevitability reduce trade efficiency and increase price tags. Gone with the days when we can take the low price of energy and food for granted. Companies who can pass the inflation to the consumer will survive and those who can’t will diminish.
• Monetary tightening – we are facing both interest rate hikes and quantitative tightening (QT) at the same time. It means the cost of money will increase. As a result, money has to be more selective about where it will land. Gone with the days they millions of dollars can be thrown to companies with no profit. Companies with good cash flows and strong fundamentals will prevail, and those who rely on repeated external funding will suffer.
• Supercycle rotation – we are in the midst of cycle rotation and the market volatility is a by-product. It is just like when the hot air heat the cold air, a turmoil will be created. and we have to accept that. It also means what has worked well in the past 10 to 20 years may no longer work and we have to adjust the investment strategies for the next 5 to 10 years based on the news cycle.

My advice…

Research shows that retail investors are often running low on financial and emotional capital to continue aggressively buying the dip in the stock market. Here are some interesting data:

• Retail investors began net selling equities whenever the average portfolio crossed below -8.5%.
• During the COVID sell-off, retail investors capitulated after their portfolio drawdown broke below 25%.

I guess given the market rout in almost all asset classes in the past 6 months, a lot of investors could have quit or intended to give up. And the selling pressure may dry up unless there is a new development in the market.

So my advice now is two things:

• Get out of overcrowded trades and speculative assets.
• Position into companies that are fundamentally sound and already profitable.

And patience is vital to implement these. As Charlie Munger said, “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

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