Good morning & happy Monday!
“Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”
– Carl Icahn, American financier
Last week I referenced this chart (also included as an attachment) that shows the S&P 500 from 1980 through the 1st quarter of 2023. Today I’d like to dive in this a bit more with a few comments / observations.
You will see from this chart that from 1980 – 2022 the S&P 500 had 32 up years, 10 down years, and 1 year with a 0% return (2011). The average rate of return during that 43 years was 8.7% (not including dividends which are a huge part of investment returns … see Monday morning memo from 8/8/2022).
Now, that’s all great, but we don’t live and evaluate and make decisions on a decade-by-decade basis, or even a year-by-year basis. We as human beings tend to look at things RIGHT NOW! What is going on RIGHT NOW is what takes our focus.
Right now the market has lots of things to worry itself with: inflation, fed policy, the banking situation, war, trade policy, regulations, legislation, and recession fears just to name a few. It is not an easy time to be an investor.
Please allow me to ask a question: WHEN has it EVER been easy to be an investor?
If I may draw your attention again to the chart above, you will see red dots with a negative sign in front of them. That represents intra-year drops, in other words the largest market drops from a peak to a trough during that year.
For example, 2022 saw an S&P 500 return of -19%, but at one point during the year (October 12, 2023) it had dropped as low as 25%. That means the S&P 500 was up roughly 6% from its 2022 low on October 12th to December 31, 2022.
Was 2022 an easy year for investors? Most certainly not!
In 2021 the S&P 500 returned a positive 27% rate of return, but there was a 5% drop during the year. In hindsight 2021 was a very calm year for investors, only a 5% drop during the entire year, which is very calm by historic precedents.
Was 2021 an easy year for investors? Well, if you look at the chart above you might likely come to that conclusion since it was one of the least volatile years over the last 4 decades.
Did you feel great about investing in 2021? May I remind you what 2021 brought? January 6 Capital riot, the inauguration of a new president and single party control of all 3 branches of government, the impeachment of a president, record-setting government spending, a national debt that was growing exponentially, Covid-19 deaths that year were approximately 460,000 according to the CRC (60,000 more than 2020), the rollout of a controversial vaccine, vaccine mandates, and the US withdraw from Afghanistan just to name a few. I don’t remember having a single conversation with any of you in 2021 where you said, “The world is in a great place and I feel at complete peace in investing right now.”
What about 2020 … was that an easy year for investors? Heck no!!!
If someone invested money in the S&P 500 on January 1, 2020, and then took a one-year nap and woke up on December 31, 2020, they would see a 16% gain and probably think it was a great year. Of course, anyone who was awake in 2020 would come to a completely different conclusion! We saw the S&P 500 drop 34% from February 19, 2020 to March 23, 2020 … but it ended the year with a 16% positive return. Crazy volatility, but a very profitable year for those who stayed the course.
Each year had its own stories of challenges that had to be addressed and struggles that had to be worked through, but you can see the profitability that has occurred over time for a patient investor.
You can also see that oftentimes there is no rhyme or reason for market movements. They cannot be predicted; they cannot be timed. The only way I know of to fully benefit from the returns the stock market provides is to patiently ride out its temporary downturns.
Here’s the bottom line: it is NEVER easy to be an investor. There is ALWAYS something (usually many things) to be concerned about. We invest not because the world is a perfect place without concerns, we invest because we believe that history teaches us that taking an ownership stake in profitable businesses provides us with the greatest possible opportunity to maximize our wealth (and thus maximize our lifestyles, impact, and legacies).
Thank you for trusting me to help you navigate these investment waters.
Make it a great week ahead!