7 Investing Reflections For 2023 That Might Pique Your Curiosity
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What a year. A once-in-a-generation market bubble began to pop. Speculative euphoria has given way to a more cautious market environment. Returns have begun to creep back into security prices.
And yet. We are far away from really attractive prices in most securities and asset classes. The returns being priced in are mostly exciting only in comparison to the absurdly high prices (and therefore low expected returns) of the prior few years. The pendulum has definitely not yet swung back all the way in the other direction.
Will it? It may, but nobody really knows for sure. What follows are seven insights inspired by the current market environment.
Debt is no longer crazy to own. Yes, I believed it was crazy to lock your money in government or corporate bonds at what was highly likely to be negative real returns. Real returns have turned positive, albeit just slightly so. So if you want a safe 1%-1.5% return above inflation, you can now have it. Should you take it? I am personally not tempted, but it’s a reasonable option for money for which you have a short to intermediate time horizon.
Stocks are not yet overwhelmingly attractive. I spent many days going through every single stock, one at a time, in the U.S. and a number of other developed markets. Very few jump out as clearly cheap based on historical cash flows. That doesn’t mean that there aren’t mis-pricings here and there if you have a differentiated view on company fundamentals. Just that the overall level of optimism embedded in security prices over the last 5+ years hasn’t receded all that much.
The bubble stocks of the last few years still aren’t particularly cheap. It would be a great narrative if we could bargain-shop among the wreckage of various tech/SaaS companies and other market-darlings of yester-year. Unfortunately, if there are deep bargains among them, they are not readily apparent to the naked eye. Don’t be fooled by the “stock X is down 50%-70% from its recent peak” type of argument. That’s irrelevant, and the peak being referred to was a huge jump from prior prices. So if a stock starts at 100, goes to 400 and is now at 150 (i.e. down over 60% from the peak), that in and of itself doesn’t make it a bargain.
As Warren Buffett has famously said, you won’t know who has been swimming naked until the tide goes out. All investors, including myself, make mistakes. However, it’s one thing to be wrong about the fundamentals of a specific company. It’s another to load up the portfolio full of astronomically-priced story stocks with limited history of success or of real profitability. That reveals more about the investor than the investments.
We are back to basics. Cash flows matter. Real ones, net of stock option expenses. Vision matters, but only when backed by a good business model with a durable competitive advantage that leads to solid profitability. No, you can’t just keep hiring people in the hopes that you will find something for them to do. Cost management matters once you realize that revenue growth is finite.
Temperament matters more than IQ. Plenty of really smart people have done really dumb things investing their own, and in some cases other people’s money. This will happen, again and again. For temperament – the ability to stay rational under extreme pressure – is both crucial to investing success and far more scarce in investing than high IQ.
Security selection will matter more in the next few years than it has mattered in the last few. In investing, it’s tempting to be an armchair philosopher. To repeat broad platitudes about industries or well-known market darlings. If that were a path to beating the market over the long-term, everybody would be able to do it. They can’t, because it’s not. As Charlie Munger has said, investing isn’t supposed to be easy, and anyone who thinks that it is, is stupid. You are going to need to put in hard work and serious security analysis to do better than the market. And that’s just the ante – you will also need to have a solid process and the right temperament to put those insights to use.
Just because we are no longer at the height of the bubble is not a reason to let your guard down. Yes, attractive opportunities are beginning to appear. However there is still plenty of danger and if you are not careful you could end up losing your hard-earned capital just as easily now as you could have a year ago. Look for opportunities, but make sure that you have the right margin of safety.
I wish you and your families Happy Holidays and a healthy and prosperous 2023!
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