I’ve been quiet for about a month now since life got in the way but I’m back (kinda). My schedule may be more haphazard but I’ll try to send out quality letters whenever I get the chance.
Anyway, let’s hop into it!
A Quick Recap
In the past few weeks, we’ve seen a massive repricing in the stock market.
The jig is up and here are some charts to paint the picture:
The story is simple, the time of euphoria seems like it’s over. The biggest names have gotten slaughtered, cheap money has gone bye-bye, and the world appears ready for a return to the brink brought on by baser human instincts (war, what is it good for?) now that Covid is apparently no longer a concern.
I was convinced in 2020 that good times were going to come, I was not prepared for how proactive the government was going to be with its fiscal capabilities but here we are.
Some good times (and bad times) came in 2020 & 2021. We saw the markets make massive rebounds, we saw new ideas and businesses break into the mainstream, we saw norms get broken, and we saw consumer/employee power rise to untold levels.
In 2022, I still think the good times (and bad times) are going to come. But its going to be different again.
I had convictions that the massive decline in the stock market during the very beginnings of the pandemic would absorb any failings on my side.
I got lucky, and it helped me pay bills and sort out things. I’m able to take the next leap in part because of how lucky I was.
This time is different, from my perspective we’re still in a wait-and-see pattern. Most of 2021 was a choppy mess (with the macro environment being bullish) and from the charts above the chop has turned into a legit market downturn.
Bullish sentiment has evaporated with the Fed Threat (we will see what they actually do in March and subsequent months), inflation has become far more dangerous in recent months, and political failures are stacking up (the infrastructure bill got multiple revisions and reductions, diplomacy is failing worldwide, and divisions grow even stronger).
The pandemic was an external threat that tore down the market, it was easy enough to see that as long as businesses had cash flow and eCommerce/subscriptions, they could return to their former valuations and even become future market winners.
Now the market is mostly afraid of itself. It’s screaming about the “price that must be paid” for all the extra liquidity in the market. Valuations are being assessed and torn asunder. Lots of new market participants are learning how hard it is to be a trader and/or an investor. Lots of existing market participants are watching their winners become losers overnight.
So Now What?
Like I said above, wait and see.
When the market is the biggest threat to itself, the path to resolution is not as clear as when there’s some external threat (like a pandemic or war).
My personal participation has decreased significantly. Luckily (I guess), my life changes pushed me out of the riskiest market bets I was making before all this shit hit the proverbial fan.
I have plenty of money in the system still, but now my 401k is the big boy and he’s following the S&P 500 just fine. I took about 50% of my other money off the table and am padding my bank account as I forge a new path into the unknown.
Whatcha Watching?
While playing wait and see, I am still trying to keep in tune with the market and see into the future.
The long game still seems unchanged. Keep investing in the big indices with your core money, they’ll correct themselves and lag the big winners only by a quarter or two.
For shorter-term bets, the downside still seems likely. People want excuses to sell.
But I think the future I’m mostly biased towards is called the Flippening (a couple of you regular readers know exactly what I’m talking about since I formed these ideas chatting with you guys).
I have a whole letter that I've been writing for a number of weeks now about it but here’s the Cliff Notes explanation:
The time for Growth (as it is currently defined) is over and the time for Value has arrived. Investors and institutions have gotten their hands burned for the last time by these crazy Growth names that were once the Belles of the Ball.
These companies that were burning cash to keep producing mediocre products/services with the goal of user/content growth OVER revenue generation and expense management are now among the biggest losers.
I think we will see a push to more tried and true business analysis which will urge the entire market into a new era of Value trumping Growth.
The definitions of a quality business (Growth) and a shitty business (Value) will change. I don’t know how or to what end yet. But I think with the new technologies (metaverse, crypto, mNRA, etc), previous tactics, maturing leaders, and faltering younglings… We have cause for a major tonal shift in how American markets operate.
The general consensus is that Apple is a Growth stock. But I don’t think so, they haven’t made a “new” or “revolutionary” product in nearly a decade. Instead, they’ve iterated on their past successes and entrenched their customers in an ecosystem. To me, that sounds less like a growth metric and more like a value metric.
Yes, their stock is very pricey. But they also have insane amounts of cash. And Warren Buffett, the big value investor, owns a good chunk of Apple.
Humans are imperfect creatures and we try to sort things in ways we can understand them, but often that sorting is flawed. I think we’re entering an era where a new sorting regime has arrived.
Welcome to The Flippening.