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A few reminders about the stock market

Some reminders about the stock market that I found useful:

It runs fast. After hitting a new all-time high on the first trading day of 2022, the S&P 500 fell nearly 13% in early March. That 8-week-long correction wiped out more than half of the 29% return in 2021.

After just 3 weeks, the market has gained about 11 percent. The S&P 500 is now down just 3% year over year.

The stock market can make gains or evaporate in a hurry.

cost Always The narrative changes. Remember what all the headlines were saying 3 weeks ago? They went something like this:

Stock market sells on fear war in Ukraine will make inflation worse than ever

Now the headlines look like this:

Stock market rallies as investors realize they act as an inflation hedge

Did it change? Price, of course.

When prices were falling it was clear that inflation was a major risk and the war was going to last an extended period. Now that prices are rising it is clear that stocks can provide a buffer against inflation as corporations can increase their earnings and the war may end.

If the stock slides from here, it will be clear in retrospect. This will also be evident if we return to new highs before Easter.

Price movements have a strange way of changing investors’ perspectives about the market.

It doesn’t always care about the headlines. Did the stock market rise 10% in 3 weeks to herald the end of the war? I sure hope so.

But even though the stock market has predicted 9 out of 5 recessions in the past and not always everything goes well, it doesn’t even care about the headlines of the day.

By the time the news is in the headlines, the stock market has digested it, moves on and what happens next.

For better or worse, the stock market tries really hard to look ahead.

This can be confusing for investors who are trying to understand market movements based on the day’s news.

It’s hard to beat. I assumed that 2021 should have been a good year for active managers. Ultimately, we had a situation where overpriced hyper-growth stocks were killed, while there was a renaissance for high quality and low valuation companies. A stock picker’s dream, isn’t it?

Obviously, it didn’t matter.

As per the latest SPIVA Benchmarking Report, 80% of active fund managers failed to outperform the market in 2021. The long-term consequences are even worse:

Professional money managers are paid a lot of money to beat the stock market. Nine out of ten fail to do so when measured over a decade-long period.

It’s tempting to try and outperform the market.

What is special about index funds?

There is nothing special about index funds other than the fact that they are low-cost, tax-efficient and simply match the performance of the market.

And beating the stock market is not easy.

Choosing individual stocks is not easy. Whenever I share performance numbers for the overall stock market over the past year or so, I always get feedback from investors who tell me that the market is far worse beneath the surface.

“Beneath the surface” loosely means “the personal stocks I own are being crushed.”

And it is true that since the beginning of 2021, there are many stocks which have been shellacked.

The US stock market has gained more than 13% in the past year. Yet, in that time, more than half of the US stock market shares are up 20% or worse from their 52-week highs. More than a quarter of all stocks are down 40% or below 52-week highs.

This year alone, 25% of all stocks in the US are up 20% or worse and we haven’t even done that with the first quarter.

One way to look at these numbers is to complain about the biggest stocks taking the market back.

Another way to look at them is to realize that stock picking is really hard. Most of the time the market is going to be smarter than your stock picks.

No one, and I mean no one, can predict what is going to happen in the short term. The stock market is driven by some combination of corporate profits, trends, economic data, fund flows, expectations, greed, fear, opinion, analysis, geopolitical events and human nature.

These variables are often in conflict with each other, especially in the short term.

You can estimate all fundamental and economic data, but pay attention to the expectations built into that data. Or you can guess the news yourself but misinterpret the reaction to that news. Or nail the market set-up but see if something comes out of left field that changes the game completely.

I don’t know any investor who stays in the market anticipating what’s going to happen next.

I know many investors who survive by creating a repeatable rules-based process that removes the need to anticipate what’s going to happen next.

When it comes to making money over the long term, survival is more important than being right.

Further reading:
stock market is ruthless

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