A friend of ours shared a funny story the other day that got us thinking a bit about what is normal. While training for an upcoming athletic competition he was participating in, he sneezed and blew his back out. He was unable to train for weeks and ended up at the hospital thinking that this couldn’t possibly be just a pulled back muscle. We commiserated that in our 20’s and 30’s we would never even have thought this was possible but now that we are all closer to 60 than 30, it is totally normal. In fact, not only do these things happen when we age but it also takes us much longer to recover than it used to.
There are a lot of parallels between his humbling experience and the market experience so far in 2022. At the time of writing this blog we are almost three quarters through 2022 and it has proven to be a difficult year. That said, we are still within the boundaries of what we would put in the category of “normal”, considering where we are on the back end of the business cycle and the magnitude of past corrections under similar conditions. It is extremely difficult to endure, and impossible to predict when the turnaround will occur.
It is during these times that we must remember that one of our key roles is to not let our behavior destroy the power of compounding. Sticking with great companies, with strong cash flow and sustainable business models is always important but even more so in difficult markets.
Looking Ahead by Looking Back
In May of 2021 we posted a Blog called the second derivative of change where we explored that fact that markets don’t care if things are bad or good; they care if things are getting better or worse. We wrote:
“At the end of March 2020, it would have been hard to argue that things were not in a bad state. We were early in the pandemic and there was massive uncertainty around working remotely, social distancing, wearing masks, travel restrictions; all things we would never have guessed would have happened so quickly. Yet, on March 23rd the market started to turn positive. Seems impossible but…..although things were still bad, they were getting worse more slowly. This is the environment that markets usually love as they are forward looking and anticipated this “worse more slowly” being the beginning of getting better.”
Although we do not pretend to know how things will unfold, we are starting to see signs that things may be getting less bad on several fronts. Down markets can sap you of your confidence and energy, but we must always be open to the fact that things can get better. We must also be realistic. Even though there are promising signs inflation may have peaked, we are “not out of the woods yet”. A clearer indication will be once we achieve a few months of declining inflation. Markets will likely stay choppy until then, but the hope is that the worst is behind us. We will continue to stick to our process, remaining patient and making adjustments only when it puts the odds in our favor to have long-term success.
Please don’t hesitate to reach out if you have questions, concerns, or comments.
“Wisdom is sold in a desolate market where nobody goes to buy” William Blake (1790)