duoogle
It is no secret that 2022 was a brutal year for investors. Shares on all the major indices plummeted to lows not seen in two years or more. And it wasn’t just stocks. Real estate investment trusts (“REITs”) and treasuries also took a beating, as the table below illustrates.
| ETF | ETF Name | 2022 Open | 2022 Close | Gain(Loss) |
| SPY | SPDR S&P 500 Trust | $476.30 | $382.43 | (-19.7)% |
| QQQM | Invesco NASDAQ 100 | $164.11 | $109.53 | (-33.3)% |
| TLT | iShares 20+ Year Treasury Bond | $146.41 | $99.56 | (-32.0)% |
| VNQ | Vanguard Real Estate | $116.21 | $82.48 | (-30.0)% |
Source: Marketwatch.com
The S&P 500 (SP500) shed 20%, but the NASDAQ, long-term treasury bonds, and REITs dived 30% or more.
As a relatively inexperienced investor (only 5.5 years), I made some mistakes in 2022 that I regret but also learned valuable lessons to guide future decisions.
How I invest
Some quick background about me. I’m 70 years old, and never had enough money to get serious about investing until I was 64. Starting in July 2016, I have been investing primarily in two types of assets: growth stocks and REITs. But even in REITs, I have gravitated towards the fast-growing companies (the FROGs) rather than the value plays (the COWs).
With the help of advisers like the Motley Fool, I built a portfolio of about 35 growth stocks that was doing extremely well. They really are very good at picking stocks during a bull market. In the five and a half years I had been investing, I had multiple positions that were sitting on gains of 100% or more, and in 90% of those positions, the buying and selling that I had done had paid for all the shares I was holding. I was effectively playing with house money. My best position was Shopify Inc. (SHOP), which I had originally bought in 2016 at about $40 per share, but which reached a high of $1760, before its 10-for-1 stock split. My average position was up about 250%.
So there I was, riding high, and my strategy was to trade the major market turns (defined as an expected runup or selloff of at least 15%, and preferably more like 25%, in a major market index, such as the S&P 500). In other words, buy low and sell high. Of course, nobody knows exactly when those turns will happen, how deep they will be, or how long they will last, so I followed the Motley Fool’s good advice to keep 3-5 years’ worth of cash on the sidelines at all times, so that I could ride out the vast majority of downturns without having to sell.
I believed at the time that the best strategy was to buy and hold. I believed this because The Motley Fool sells that idea very hard, and that’s where I started my investing journey. I thought my investing horizon was still 10-15 years. So I was conflicted, wanting to buy low and sell high, yet also buy and hold. I didn’t yet know myself fully as an investor. Probably still don’t.
In light of what happened in 2022, I am recalibrating my strategy, based on the following lessons.
Major lesson #1. The bull market cycle is almost over (in fact, it may already be done)
I rely on Avi Gilburt‘s analysis in The Market Pinball Wizard as my guide for the big picture market context, to anticipate the likely price points where the market will make major turns. It is not perfect, but it is rigorous. You can’t time the market. Everybody agrees on that. But you can definitely study how the market moves, and learn to interpret what it is telling you.
Experienced firefighters will tell you that sometimes when they walk into a burning building, the fire talks to them. Most of us don’t have ears to hear what the fire is saying, but some firefighters do. Avi Gilburt is like an experienced firefighter. The price movements of the market speak to him, and he doesn’t have to have special “ears” or mystical powers to hear it. The methodology is rigorous, quantitative, and teachable.
In any case, although it is not perfect, Avi’s method is far better than 50-50 in its predictive powers, and provides a sound basis from which to trade with confidence, although there are of course no guarantees. At any given point in time, he will have a primary expectation that lays out the path he believes the market is taking, and he will always have at least one alternate case, and he always designates which one he thinks is more likely.
By late February of 2022, Avi was candidly admitting to his subscribers that he was surprised at how deep the selloff was, but still holding to his prediction that there would be one more higher high, above 5000 on the S&P, before the end of the bull market cycle that began in 2009.
However, a few months later, while he still believed, based on his counts, that there would be a higher high, he conceded that it was possible that the bull market was over, and began recommending risk management strategies based on that latter assumption. He further stated that when this bull market cycle peaks, the bear market that ensues (and may have already started) will likely last for at least 5 and possibly as long as 21 years. That’s too long for me to wait around!
Major lesson #2: You don’t have to sell right at the top, and it’s okay if you are the last guy to sell, right at the bottom
Based on Avi’s team’s analysis, I was expecting the NASDAQ to reach a major top at about 16,200, so in late 2021, I was selling incrementally and did quite well. However, when the calendar flipped to 2022, and the market had already sold off substantially, I did not continue selling. In retrospect, I wish I had.
I was inordinately afraid of selling at the bottom and sold only enough to make sure I had 5 years’ worth of cash in reserve. I didn’t stockpile cash to redeploy after the bottom was reached. That was a mistake. I was reduced to just waiting and praying for the market to bottom. I could have had a lot more cash awaiting the huge buying opportunity to come, and a lot more money to support my church and other nonprofits.
Now I realize it’s no big deal. So what if I do sell some at the bottom? During any major market move, there are numerous clear (though smaller) buying and selling opportunities along the way, regardless which way the trend is running, so if you miss one, another comes along pretty soon. And if I sell some at the bottom, the ensuing climb will usually be long enough to afford plenty of buying opportunities on the way back up.
Major lesson #3: Don’t get complacent, keep looking for buying and selling opportunities, regardless of which way the trend is running
Because I was holding mostly house money shares, I was pretty complacent about the selloff, even when it went farther and longer than I expected. In retrospect, I wish I had sold perhaps 80% of my remaining shares (even though they were house money), when the price plunge dragged the 15-day SMA (simple moving average) below the 50-day SMA. Then I would have had an abundance of cash, and could simply wait for the market to turn back up, thus buying back the same shares at pennies on the dollar. (A modified buy and hold strategy with vacations, if you will.)
Major lesson #4: Let the market and your age dictate your investing horizon, buy and hold is mostly for suckers
If there is in fact a 5- to 21- year bear market right around the corner (or less likely, already in progress), then it would be foolish for a 70-year-old investor to cling to a buy and hold strategy. I could very well die before the bear market bottoms. (By the way, that’s true, no matter your age.)
Instead, my plan from now on is to cash up more robustly near the top, and keep on cashing up at opportune times as the selloff continues. I am actually pretty angry at myself for drinking the buy-and-hold Kool-Aid. I did alright, but I blew a golden opportunity, the likes of which I may never see again in this lifetime.
I also put myself in a position where I had to go out and earn more income, in order to ride out further price decline and still have a little more cash to invest when the market bottoms. I could have been doing other things I enjoy a lot more.
The rationale the Motley Fool puts forward for their buy and hold Gospel is that the market has always recovered from every selloff, and gone on to higher highs. They will be among the first to remind you that past performance is no guarantee of future results, but that fallacy lies right at the heart of their buy-and-hold orthodoxy.
Folks, once the market does peak (very likely at or below 6000), the buy and hold strategy will be fit only for young investors with very long investing horizons. For everybody else, it will be a wealth-destroying machine. If Avi is right about the coming bear market, and it lasts for at least 7 of the potential 21 years, then I fully expect the Motley Fool to go out of business. Even value investors will be fleeing the market, following round after round of dividend cuts.
Major lesson #5: Value investing works better than growth investing during a selloff
The share price declines of value stocks tend to be less dramatic, and are offset by greater dividend income. This is particularly true when the selloff is driven by rising inflation. When inflation spikes, growth stocks get hammered, because the value of their future cash flows is markedly diminished. High-yield stocks do better than usual, because retirees flee to instruments whose yield at least matches the inflation rate. For as long as inflation stays hot, high-yield investors get the best of both worlds: high yield and rising share prices.
Investor bottom line
If you invest long enough, soon or later the market will kick your butt. I did alright in 2022. I was not forced to sell in order to pay my bills. I raised a little cash from some opportunistic transactions and some gainful employment. But I missed a golden opportunity for life-changing amounts of profit and suffered a greater-than-necessary shrinkage in my assets, and diverted my time into less enjoyable pursuits. Buy and hold was not a good idea, even if the market rises to new heights in the near future. I don’t intend to miss the next opportunity when it comes, because, at my age, it could be my last.
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