Lessons Learned – May You Live in interesting Times

Lessons Learned – May You Live in interesting Times

December 19, 2023

Lessons Learned – May You Live in interesting Times

December is always a good time to reflect on the year just passed, what lessons we learned, and how we can grow in all aspects of life in the year ahead.  Here are a few investing lessons learned (or in most cases relearned) from the last 12 months:


  • The balance sheet matters. Most investors just look at the profit and loss statement, or P&L, when assessing a potential investment.  What are its sales, net profit margins, etc. However, balance sheets are very important as when storms arrive – and they inevitably will – it is those who have the strongest ship (i.e. balance sheet – cash on books, low debt, etc.) who will weather the storm and come out the other side even stronger. The banks that failed this year did so for the main reason that they didn’t have their balance sheets in order. The oil and other companies that failed in 2020/2021 mostly failed due to weak balance sheets (meanwhile CVX and XOM raised their dividends).  Pay attention to debt and cash levels when assessing a future investment.


  • Last year’s zeros can be this year’s heroes.  2022 was the year of value when companies like pharmaceuticals and other dividends paying value stocks performed well while growth stocks – even the best ones like GOOG, AMZN, META, etc. - lost 30%, 40%, 50% or more of their value.  2023 reversed that trend where growth stocks (primarily the quality ones) were strong and many value dividend paying stocks struggled.  Trends don’t always reverse based on a calendar year – sometimes they can last for many years like in the mid to late 90s when growth outperformed value, only to have that trend reverse for much of the 2000s.  The lesson here is that taking a ‘barbell’ or balanced approach to your portfolio can be advantageous.  You can periodically rebalance when a particular style or sector which has outperformed.


  • Don’t let macro-economic predictions drive your investment strategy.  As Warren Buffett has said, he spends about 5 minutes each year on economic considerations, and that is 5 minutes too much.  No one - not even our Fed Chairman Powell – can accurately predict economic movements, let alone how the stock market will react to them.  There are just too many variables, too many unknowns.  How quickly did we shift from interest rates racing to the sky to interest rates falling (look at a chart of the 10-year treasury interest rate)? Focus on financial planning, asset allocation (portfolio construction), stock fundamentals, etc. and you will do fine.  Try to predict – or react to (get whipsawed by) the non-stop commentary about the latest weekly job or inflation number, and your results will likely suffer – not to mention your blood pressure.


  • Exogenous events can drive short-term market movements. You can listen all day to financial pundits talk about what will happen at an upcoming fed meeting, etc., but it is likely something no one is talking about – some unknown – that will move markets.  A war.  Some bank very few people have ever heard of blowing up.  A third world country currency crisis that spreads throughout a region.  So, the ‘bad’ news is that these things, by definition, are not possible to predict.  The ‘good’ news is that the broad stock market impacts these headlines have are often short lived –  (it was not that long ago that many smart economists were predicting hundreds of bank failures – there were less than 5).  Stick to the basics, be humble, recognize the world is complex, hold comfort in the fact that strong companies will likely stay strong companies no matter what the world throws at them.


  • Asset allocation matters. As with most things in life, investing should start with a plan – goals – and that entails asset allocation.  How much money do you need in the coming year, what will your needs and wants be in retirement, etc.  This should drive your investing program, not commentary by Jim Crammer or Jerome Powell.  If you get asset allocation right (and this is what accounts for 90% + of returns), then you’ll be able to sleep at night regardless of what the stock market does since you will have pre-emptively mitigated any short-term price movement risk (by setting aside cash for short-term needs and putting into stocks funds you don’t need for about 5 years or more).


  • Match your assets with your liabilities. This is another way of saying properly asset allocate.  The bank failures we saw last spring were related to mismatching assets and liabilities.  The banks invested in long-term bonds (assets) when their customers wanted their money back (bank liabilities) in the near term.  So, the banks had to sell long term bonds at a loss, and voila, bank failure.  Make sure in your personal financial life you do not make the same mistake.  For short-term needs (liabilities), have short-term assets (cash, short-term bonds, etc.).  For long-term liabilities (paying bills many years from now), have long-term assets (stocks, etc.).


  • Things can go right, too. To end on a positive, and realistic note, despite the endless doom and gloom hyped by the financial media (whose job it is to sell ads, not manage your money), things can also go right.  Sure, the world is full of challenges – always has been, always will be (we just hear more about it today than in the past due to increased media).  But it is full of amazing things, too.  Innovation, hardworking people, heroes, etc.  When things seem the gloomiest, when the headlines are the bleakest, that is often the time to put capital to work.  Stocks go up over time.  As Peter Lynch said, more money has been lost by investors trying to anticipate corrections than in the corrections themselves.  If you are waiting for all the headlines to be positive and happy before investing in stocks, you will cost yourself huge amounts of money (opportunity cost).  When I bought my first stock the DOW was below 1,000.  It just crossed 37,000 this week for the first time ever. The number of bad headlines – and legitimately bad things happening in the world during that period - is astounding. Yet over time stocks kept climbing and climbing due to our even more astounding economic system.


Here is to a prosperous, healthy, peaceful 2024!