Seven lessons from last year’s markets
2 021 has been another amazing year in the markets, global share markets are up and amazingly, volatility remains at relatively low levels. This is a very different outcome to what we expected at the start of the year, but there are some great lessons to take forward into everyone's investing journey.
1. Expect the unexpected
At the start of 2021, no one expected that global markets would rise a further 20 per cent in 2021, following an impressive 15 per cent rise in 2020. Investors now have benefited from a providing investors with a 30 per cent return over the past 2 years despite living through a pandemic.
Economists, investors and market strategists have been continually surprised by the strength of the economy which has driven some of the strongest earnings growth of all time.
Reiterating the point of expect the unexpected, very few of the factors driving markets today were thought about at the start of the year, and most not even 6 months ago:
• Ongoing crackdown in China targeting the tech, education and financial sectors.
• The emergence of inflation for the first time in over 30 years, Central banks around the world have been trying to encourage inflation for over 30 years and now it has come roaring through at levels not seen since the 1970's.
2. Social media has changed the way markets operate
Only a few years ago, there was a strong belief that institutional investors were the only ones that mattered. Because of their size and scale, institutional investors could drive market outcomes, retail investors were too small and dispersed to do this.
The Reddit group WallStreetBets (with its 11.4 million members) destroyed that theory in January when a very large number of retail investors decided to buy some of the most shorted stocks on the American Stock exchange to force losses onto large sophisticated hedge funds.
Hedge funds will "short" a share when they believe the share price will fall. They do this by borrowing a share and selling it today with the hope of purchasing a share at a later date for a lower price. They win if they manage to sell the share today at a high price and repurchase the share in the future at a lower price.
Combining social media and low cost trading platforms which let you trade for free (or so it seems) has shown that retail investors can move in large packs and sway markets.
When WallStreetBets started targeting GameStop and AMC, two of the most shorted companies listed in
America the share prices rose 5 or 6 times leaving hedge funds nursing hundreds of millions of dollars of losses.
3. Trying to time the markets is truly impossible
The equity market has gone through a number of periods of volatility in 2021 when a new piece of news appears. I call it the mid month wobbles, every time there is a new piece of negative news investors start to think that we are staring down into the abyss, though they are quickly proven wrong a few days later.
Whether it be Omicron, rising interest rates, slowing economic growth or high inflation nothing has managed to throw the market off its ongoing trajectory.
Any investor that has reduced their market exposure (potentially logically) expecting a downturn has been badly burned.
This is one of the main reasons why the average hedge fund has underperformed the S&P500 by about 10 per cent this year.
4. FOMO investing rarely ends well
FOMO investing is when you invest because everyone else is doing it, an investment decision is based on the fear of missing out on returns rather than a well thought through investment strategy. Some common FOMO investments include GameStop, AMC, Bitcoin or even Air New Zealand.
A basket of the top 25 Meme stocks (those that the Reddit crowd talked about the most) is down 22 per cent since Mid January. This adds credence to the theory that if it too good to be true and you don't it, then it probably is too good to be true.
5. Good management can create great companies
There are some great examples of phenomenal turnaround stories in 2021 that really drive home the rule that great management teams make great companies and great investment teams.
Elon Musk is divisive and goes about things in an at times bizarre way. But there is no hiding the fact that he has managed to drive his people and teams to completely transform the auto and space industries. With him and his drive at the top, it is hard to see is companies failing.
Hertz is another company that has managed to emerge from bankruptcy earlier in the year with a new management team and a new strategy. Investors that saw through the depths of the bankruptcy are looking at a 1000 per cent return on their investment
6. Crypto finally moved main stream
We have seen crypto move into the mainstream with banks and asset managers now starting to help their clients invest in the asset class. We have now started to see large hedge funds invest in crypto and it is becoming an accepted asset allocation to apply crypto in a portfolio (2-3 per cent).
7. Diversification is critical to any investment strategy
2021 has most definitely not been a year where rising tides lifts all boats. It has been a difficult year for certain sectors and geographies.
The NZ market is likely to post its first negative return year for over 10 years, Hong Kong has fallen by 15 per cent and the Chinese market is only slightly negative. All of this while the US market is up 28 per cent.
This divergence in performance demonstrates why it is important to have your eggs in lots of baskets because you never know what market will fire next!