A Terrible, Horrible, No Good, Very Bad Day

Inflation is at levels we have not experienced for decades. The daily volatility of markets is unnerving. Interest rates are rising.
The messaging from the media is running rampant providing no comfort. We are scared and would prefer to wait it out on the side-lines. It reminds me of the title of a book by Judith Viorst: “Alexander and the Terrible, Horrible, No Good, Very Bad Day”. Just replace “Alexander” with “Investors”. It feels like a dangerous time to invest.
How quickly things have changed.
A year ago, the so-called FAANG stocks (Meta, Amazon, Netflix, and Alphabet) were flying high. FAANG funds were launched and attracted a lot of attention and money from investors. No price seemed too high for these darlings. These companies are now down between 34% (Amazon) and 71% (Meta) from those earlier lofty levels. In fact, Meta is down so badly that it’s underperformed the S&P 500 since its IPO on a total return basis.
Bitcoin pushed through the $60 000 level and many people in the know predicted $100 000 as the “next stop”. It is now just above $20 000.
NFT’s attracted serious attention from investors: Pictured here, is a Loot bag: A text file consisting of 8 phrases overlaid on a black background. As it turns out, this text file is also an NFT, “Loot Bag #748,” and it sold for $800 000. Closer inspection reveals that it consists of words reflecting items a character might wield in a game like Dungeons & Dragons.
NFT’s were wild. I am not sure what it is worth now.
A year ago, nobody was beating the end-times drums. Counterintuitively the market then felt less risky than today. Nobody knew what would happen next.
We were sitting on the tail end of a 12- year bull market with interest rates at zero. In March 2021 the S&P PE-ratio pushed through 31. Today it is trading at a PE level of about 19. But a year ago markets felt less risky.
“Risk is a paradox. It is highest when we forget it exists, and it is lowest when it’s all we can think about.” – Jack Raines
It is when people are not thinking about risk that things get risky. When we are more concerned with the next dollar. Today it feels like there is too much risk to be investing or to stay invested. This runs counter to truth that the risk is lower today than what it was at the beginning of 2021. All things considered it is a bit late to be a doomsday profit. The market today is cheaper than a year ago.
A lot of bad stuff is already behind us. The risk has already happened. We experience and want to act upon risk in the present. This why investing is so difficult. There is a problem with our perception of danger. We think it’s a lead indicator—a warning sign that something bad is going to happen, and we should act (or stop acting).
“Fear is an emotion that functions on a lag. By the time we retail investors perceive the risk, it’s usually too late to do anything about it.” – Katie Gatti Tassin
The markets however are always forward-looking. It does not react to what has already happened. Market prices reflect future expectations. Markets usually go down before recessions start and improve before recessions end.
Are we at the bottom? Who knows. But based on experience we know that we would have been rewarded for investing or staying invested during a recessionary bottom.
When markets peak and are expensive it intuitively feels less risky. When markets bottom and are cheap it feels riskier. Our feelings unfortunately are wrong and lead us to behave in ways that is not in our own best interest.
With the benefit of hindsight, when markets decline, we always think that “all the signs were there” and therefore obvious. This creates the dangerous illusion that we should have seen it coming and therefore done something about it.
Hint…. how many media publications covered this “knowing” in advance. Nobody.
That is the reason why you need to commit to an investment process and manage your own behaviour, especially when you don’t feel like it.
The Office’s Andy Bernard once said, “I wish there was a way to know you were in the good old days before you actually left them.”
The above article was written by Marius Kilian.
Sources:
*Katie Gatti Tassen, Money with Katie – “In Investing, Fear Functions on a Lag: What History Tells Us About Stock Market Returns in Recessions” (Oct 2022)
*Jack Raines, Young Money – “Rethinking Risk” (Oct 2022)