Why 2022 Has Been The Best Of Years (No Really)
One day your investment account will thank you for 2022.
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If It’s Not Hurting, It’s Not Working
Investing and trading is a lifelong discipline, and whilst you can certainly achieve a base level of competence, you never stop learning. The sheer complexity of securities markets and the always-changing political and economic framework within which they operate means that the moment you think, “Aha! I got this!” is the very moment it all starts to go wrong. And when they go wrong, you may think this is due to (1) karma for things you did in a past life (2) Hedge Funds (3) Market Manipulation (4) Your Own Stupid Brain (5) Jerome Powell (6) Joe Biden (7) [ Insert Your Choice Of Scapegoat Here].
Coming to the end of 2021 most right-thinking folk could see a correction upon us. In our premium Growth Investor Pro service we sounded the heads up last November.
Most folks would have reasonably concluded, well, the game is likely up in growth, time to head to value. And bought stocks like Verizon ( VZ 0.00 ) , AT&T ( T 0.00 ), Lockheed Martin ( LMT 0.00 ), Northrop Grumman ( NOC 0.00 ), ExxonMobil ( XOM 0.00 ), that kind of thing. Bought some bonds too, and then left the rest in cash with a smattering of growth names just in case the party kept going.
That would have been very sensible a year back. You would have - should have - clapped yourself on the back if you did this.
Unfortunately if you did that? You would have had your proverbial handed to you this year. Growth stocks down, value stocks down, cash eroded by inflation, bonds down. Jeez!
There were three winning moves only in 2022.
One, leave it all in cash. By year end it would be worth say 5-8% less, depending on what you think the real measure of inflation is.
Two, put it all in energy stocks, the only consistent winning sector this year.
Three, short the S&P and/or the Nasdaq, ideally with an extra-spicy triple levered inverse ETF like SQQQ 0.00 or SPXU 0.00 .
Other than that? No dice. You were either chasing your tail all year to make bank, or you have simply lost money.
Now, this year has been very much not normal and for this reason you should be forever grateful to 2022 because no matter who you are, how good you consider yourself to be at the money game, whether you’re a Boomer, an X’er or a Zoomer, there were many, many lessons to be learnt this year. And of course, it ain’t over yet.
Zoomer
If you are relatively new to investing, and you expected the 2022 correction to be like the 2020 correction (or the 2018 year-end fail and 2019 bull market for that matter), you learned that sometimes the misery doesn’t snap out of it - it just keeps on coming. That every time you think the market is going to break out to the upside, it rips your money out of your pocket again and heads back downstairs. That the reason your parents raised an eyebrow at that whole BTFD thing was because, er, it doesn’t usually work. That a lot of people seem to enjoy down markets (all of FinTwit are now bear market experts of course). That nobody from DC is very much interested in saving your investment account, election or no election. In short - you learned what a larger-degree Wave 4 down feels like. Oh - and it may not be over yet. We can’t say for sure.
Anyway, look. You have time on your side. Lost it all? Work harder, earn some more, go again. Don’t tell us about house prices. One, it never was easy and two, they’re going to get cheaper, and three, find something to do that pays a lot for your time and then, er, put in a lot of time. A LOT of time. Like, don’t bother leaving the office till midnight and be back in at 7am. Unless you have a real live project on, in which case, sleep under your desk. This is the time honored way. You can do it. It will work out fine if you do.
Your lesson from 2022 is, this investing game is DIFFICULT. It if it wasn’t, everyone could do it and would be rich. Don’t quit out. Stay the course. Learn, learn, and go again. And bear this in mind:
One of our number here at Cestrian started their career in venture capital. Started in the middle of a huge downcycle when whatever you did, it probably went wrong. Career worked out great, because this baptism of fire meant that said investor was always on the lookout for the bad thing. Whereas folks that joined the industry a few years earlier in the go-go years assumed their own genius is what had delivered outsize returns, not just an up cycle. And most of these geniuses couldn’t cope with the bad times and quit out to do something less intense instead. Mistake.
The very best skills are forged in the worst of times. Without exception. So stay the course. Even if you blew your account up twice over. Start again with a small pot of money you can afford to lose. And play it smarter this time. Be more cynical, more careful, cuter, sharper. Better.
Gen X’ers and Boomers
If you are old lags like us then the unceasing misery in and of itself hasn’t been news. It was like this from 2000-3, from 2008-11 and that’s just the last twenty years’ worth. In fact the thing that is surprising to us is quite how miserable everyone is for no particularly good reason. It’s just a bear market. Happens. The world isn’t ending. Capitalism isn’t getting overthrown. Stocks are just selling off is all. High-multiple growth stocks flew the closest to the sun so are having the nearest encounter with the hard deck. Situation normal.
What has been extremely useful this year is the wall of well-researched opinion, if you go looking for it, as to what has been driving the relentless down pressure - and why, for instance, conventional tools such as the Vix have been of little use. (Because, by the way, another old-lag play would have been to be short the market and long something like UVXY 0.00 . The short part would have worked this year. But the long volatility part, not so good).
Some tools we’ve picked up this year and now use to sharpen our analysis include:
Stocks are derivatives of options, not vice versa. Well, not quite, but often it seems that way. The sheer volume of capital sloshing around the options market has meant that particularly for indices and high-volume names like AAPL 0.00 , you need to understand how options move stocks in order to handle your stock decisions. You need to know when the major expiry dates are and you need to know whether the weight of capital is long (call-heavy) or short (put-heavy). And then you need to understand what happens when all those options expire. It's not obvious, but with the help of work from SpotGamma (click here and use coupon code CESTRIAN for a 2-week free trial) and others we now factor in monthly- and quarterly options market movements in our index analysis in particular. And we can tell you it's very effective to do so.
The VIX index won’t help you because Big Money is onto your VIX game. Chad and the Basement Bros learned in 2020 how to read the VIX and use it in stock and option trading. So Big Money has changed the game. Between the increasing prevalence of institutionally-held 0DTE options - which aren’t captured by the VIX at all - and the suppression of volatility itself achieved by continuously rolling out and down the index put floor - Big Money has put in a superb performance in its controlled demolition of retail accounts this year. (It has demolished plenty of single-strategy hedge fund accounts too!)
Stock charts will tell you what is going to happen IRL, if you look closely enough. Then you can react accordingly. If you were watching the prices of wheat and corn futures as the Russian forces were building up on the Ukraine border, then you knew that the market expected a war. And you could have made plans accordingly. If you were just watching the news? Then the invasion came as a shock to you and your account was shredded before you could get to it. This isn’t magic. Big Money talks to Big Power, shares an office with it, shares lunch with it, shares a lot of things with it. Big Money won’t go on CNBC to tell you what they are going to do - if you see them on CNBC assume they are lying to you and doing the opposite of what they say. But watch the key charts - commodities, gold, indices, the dollar, oil - and you will find the breadcrumbs than can lead you to what they are actually doing.
We could go on. Speaking for our staff personal account investing and our various subscription services, we are WAY more skilled now than this time last year, because we’ve used this period of destruction to learn more tools and methods than ever before - which will work in any market, up or down.
Been a tough year for all investors because - we can tell you - literally nobody just went, ah, put it all in SQQQ 0.00 and head to Hawa'ii - NOBODY did this, whatever they tell you. If you're up, you worked hard to get there. Down, you worked hard to prevent from being down more. Tough year. The market will go up or down into year end, doesn't matter. If you did your work this year you'll be heading into 2023 like us - toolkit sharpened, appetite and ambition elevated, red light switched on, laser focused on the win.
Adopt this attitude and we can tell you from experience that you’ll look back in a couple years and say - 2022? It was the making of me.
Cestrian Capital Research, Inc - 20 November 2022.
Excellent perspective! Thank you.