What lessons did 2022 teach us?

19th December, 2022

Published in The Sunday Times on December 18th 2022.

The popular Christmas song, “It’s the most wonderful time of the year” presumably wasn’t referring to the fund manager year-ahead outlook season. My inbox has been filling up this past month. On one level, the whole process is a monumental misuse of time.

2022 has laid waste to any notions of prescience that investment strategists may have been harbouring. There were precious few (read none) outlook reports with ‘Russia invades Ukraine’ or ‘double-digit inflation’ on the ‘things to watch’ list for 2022.

On another level though, it’s important for investors to understand what way the wind is blowing so they can get a better sense of what direction to face. I read them sparingly. Most seem to agree that global GDP (Gross Domestic Product) growth will keep slowing and that inflation will crest but remain sticky. Central banks will keep tightening, albeit at a reduced pace relative to this year. Recession in the UK and Europe is seen as highly likely. A US recession in 2023 is closer to a coin toss.

I’m not sure, in fact I’m quietly confident, none of this will help you determine what you should do with your hard-earned cash in 2023. What will serve investors better I believe is reflecting on what lessons or reminders we got from financial markets in 2022. There were plenty, but in the interest of brevity, I’ve distilled the list of reminders to three.

Financial media has no incentive to help you succeed

2022 reminded me about the role of financial media and the role of an investment adviser. They have very different incentives.

Financial journalism is a business. Its business is in selling advertising. Its mandate is fully discharged when someone consumes some element of its content. And that content is a non-random sample of the worst things that could happen at any given time. The world as seen through the prism of daily financial media seems to exist, as the Americans might say, at DEFCON 1 – perpetually on the verge of imminent crisis.

The gong for most apocalyptic must go to Dr. Doom himself, Nouriel Roubini. Christian scriptures had merely four horsemen of the apocalypse. Roubini sees the world facing no less than ten ‘MegaThreats’ as enlisted in his eponymously titled book. He’s a good storyteller and his warnings should not be ignored. But there are several possible paths the future might take and not many of them lead to the catastrophic outcomes he enlists.

The media has no incentive to help - much less cause - investors to succeed. Its role is the complete antithesis to that of an adviser - in the eyes of the financial media, taking a long-term perspective is the worst thing you could do. Bear that in mind as you read or listen to most financial commentary.

Professional investors fall foul of biases too

My second reminder from 2022 was how behavioural biases aren’t just something experienced by amateurs. We’ve too many acronyms in investing, but one of my least favourites from the last few years was FOMO. A “fear of missing out” gripped global markets, lifting everything from stocks to cryptocurrencies to record highs over the last year. As the FOMO narrative has it, investment money piles into particular assets not because it necessarily believes in the underlying opportunity but because the returns are presented as unmissable and the consequences of delay as harmful. FOMO is a version of well-known behavioural biases (like herdthink) and is typically associated with amateurs. But 2022 reminded us that professionals are just as likely to fall foul of this.

The rapid and spectacular collapse of FTX, which was the world’s third-largest crypto exchange, is a lesson in the importance of due diligence and the blinkering power of herdthink. Some of the biggest names in venture capital including Sequoia were hoodwinked by Sam Bankman Fried’s apparent messianic tale of cryptocurrency domination.

The investment world is a big place. You are guaranteed to miss out on things that do spectacularly well. Stick to what you understand and don’t be swayed by what others are doing, even the very sophisticated.

The age-old issue of timing should be put to bed after 2022

And my final reminder from 2022 - though we really shouldn’t need reminding - is on the futility of market timing. It’s incredibly hard and 2022 provided the perfect antidote to the idea that you can profit from it.

The US stock market, as measured by the S&P500, has seen daily swings of plus or minus 2% on 45 trading days in the first eleven months of 2022. This compares to only 7 days in the entire calendar year 2021. Sustained volatility like this is manna from heaven to trend followers who are amongst the rarefied few that are having fun - and making money - in 2022.

For the average investor, volatility on this scale is close to unendurable. But it’s a price historically that has been worth paying. Hold your nerve and try to ignore the latest investing acronym FOHO - fear of holding on.