2023 in Review: No One Knows Anything
To review this past year, let’s first take ourselves back to October 2022. By mid-way through that month, the S&P 500 was in a 25% drawndown for the year. The market bottomed on October 12th 2022.
We are not normally ones to toot our own horn, but sometimes you just have to.
On October 17th 2022, five days after the market bottom, we wrote:
“The market is down. It will go back up. Now is the time to invest.
NOW IS THE TIME TO INVEST.
If you have cash in the bank, what are you waiting for? What are you waiting for?
The all-clear?
It won’t come. There is never an all-clear. There is never a bell.
The bottom?
You won’t catch it.
You may live with a little short-term regret if the market continues to go down, but you will avoid the long term regret that comes from looking back and thinking, damn, I wish I had put some money to work then.”
Look, we are not some sort of genius market timers, we really are not. We don’t pour over charts looking for technical indicators. We just look at history and understand what has always happened and what will always happen, so long as humans continue being humans.
(If you had invested in the S&P 500 the day after that blog post, you would be up 26%. And some of you did – we received over $10m in investments into client accounts between October and December 2022.)
2022 was a horrible year for the markets (if you want a reminder of that, go back and read our year end review for 2022). All we knew back then was that prices of the best, most soundly financed and managed business in the US and the world, have gone down often, and sometimes significantly. But never for long. They never stay down.
We can never know when things are about to turn, but risk is always the lowest when it seems the highest, and always the highest when it seems the lowest. When markets go down, forward returns increase. This is one of the most important fundamental concepts of investing, but one of the hardest to grasp, because it goes against everything our brain is telling us during a market fall (which is that the investments no longer have value and risk has gone through the roof and the only thing to do is run for the exits).
It’s human nature. The problem is that it’s quite clearly wrong. As one Wall Street humorist has observed, the stock exchange is the only place on earth where, when they have a big sale, everyone runs screaming out of the store.
We didn’t run screaming out of the store, and fast forward to the end of 2023 and the S&P 500 hit an all-time high. That means, it recovered all of it’s losses. From January 1st to December 31st 2023, the S&P 500 rose 26%.
By any measure, 2023 was a damn good year.
And it wasn’t just the S&P 500 that did well. The Russell 2000 index was up 17% (it rallied 23% in November and December). Our larger European ETF rose 20% and the Emerging markets equivalent was up 12%. Japan (which Guy added to client portfolios at the end of 2022) was up 40%.
The majority of client accounts that were invested over the full year posted returns north of 20%.
In a true testament to the failings of human nature as an investor, Wall Street Strategist (these are very smart people who are paid a lot of money to make predictions about the future) predicted 2023 would be a down year for stocks.
This doesn’t happen very often – strategists normally predict the market will go up, because, well, it normally does go up. You can see in the chart below that strategists haven’t predicted a down years since 2000!
So, just to make this point crystal clear – we entered 2023 with the first calls for a negative year since 2000 and the market returned 26%.
That’s why we don’t invest on headlines!
And it wasn’t just the strategists that got it staggeringly wrong. Economists did too. Midway through 2022, when polled, 85% of economists predicted a recession in the next year. People were pretty sure a recession was coming.
What actually happened in 2023 is that we had some of the strongest GDP data since 2014.
When everyone agrees that something is going to happen – recession, bear market – you can be pretty sure something completely different is going to happen. And that is a message we reiterated many times to our clients in 2023 when asked whether we thought a recession would happen and what we should do about it.
The longer I spend in markets, the more I realise how little you have to know – it’s not about knowledge or predictions or some smart trading strategy – it’s about understanding history and psychology and just knowing, with absolute resolute faith, that markets actually never really change because humans never really change. They don’t do what we want, or what we think. The short-run movement is totally irrational. What we can always rely on is that the long-run movement is totally rational.
Not to toot our own horn again (but I am going to), we wrote in our 2022 year-end newsletter that, in general, really bad years in the market are followed by really good years in the market (barring the world actually falling apart, like it did in the early-mid 70s and early 2000s) and we quoted median positive returns of 27.6% following a double digit down year like 2022. (We were a little off – the actual return was 26%).
What we said a year ago was certainly not a prediction (we never make predictions) it was simply an analysis of the data and an application of the ‘history doesn’t repeat itself, but it does rhyme’ principle.
Going into 2023, everyone was hopelessly pessimistic, and that was understandable after the year we had in 2022.
What puzzles us is how that continued as we moved through the year, even when the data and the market suggested otherwise.
Ben Carlson wrote a blog post in October where he discussed the divergence between sentiment and economic data. It’s strange that the economy is strong, unemployment is at record lows, the market is at all-time highs, and people are depressed. Thoroughly depressed.
The chart below, from The Economist, shows how sentiment has tracked economic data over the past 40 years. Right up until the pandemic. The pandemic changed that. It changed almost everything.
What has happened to our psyches since the pandemic is that Americans have been gloomy despite a strong economy. The media has a lot to answer for here too of course. Morgan Housel touches on why the news is always pessimistic in his new book ‘Same As Ever’.
He writes:
· Bad news gets more attention than good news because pessimism is seductive and feels more urgent that optimism
· The odds of a bad news story – a fraud, a corruption, a disaster – occurring in your local town at any given moment is low. When you expand your attention nationally, the odds increase. When they expand globally, the odds of something terrible happening in any given moment are 100 percent.
We see more of the bad stuff than we used to – our horizons are so much wider. And there’s plenty of bad stuff going on in the world to capture our attention.
But as Jon Connell, founder of The Week wrote recently, let’s not forget the world’s successes. Last year might have been “notably grim”, but it may still have been “the best year in the history of humanity”. It’s hard to square those two statements, but one thing I have come to realise as an investor and a human, is that we have to be able to hold two competing views in our head at once. F. Scott Fitzgerald once wrote: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”
To quote Connell, last year global child mortality fell to yet another record low – a million fewer children died last year than in 2016. It’s the same with extreme poverty, out of which around 100,000 people are emerging every single day. Connell notes that when he points to human progress, people complain….“they think it’s offensive to hail progress when the future seems so bleak to so many”. When the news is unremittingly gloomy, people “tune out and despair”. “Despair is paralysing, not empowering.”
As investors we must never despair. We must always understand that progress is possible, and whilst things can and do go wrong, we humans are capable of amazing things.
And those amazing things, that relentless progress; do you know where it shows up? It shows up in the price of the companies that we own. The great companies of the world ceaselessly innovate. New products, new services – the innovation cycle never ends. Indeed, AI may be enabling the greatest cycle of innovation that the world has ever seen.
“On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us - Thomas Babington Macaulay”
At Liberty Wealth we operate from a philosophy, not an outlook. A philosophy is impervious to change, whereas an outlook is constantly changing. We can’t be long-term, patient and successful investors if we react to an outlook because it would leave us constantly making guesses about the short-term movement of the markets, which we know is entirely unpredictable.
Understanding human limitations (we don’t have crystal balls) means the only real prediction we make at Liberty Wealth is that, markets will mostly go up, but sometimes they will go down. That said, like last year, we can look at the data and see if it gives us any clues as to whether this year might be a ‘mostly’ sort of a year, or a ‘sometimes’ sort of a year.
The question to ask is – what has happened historically after a 20% plus up year? Or another question might be – when the market hits an all-time high, what has historically happened next?
Luckily, others have done the work for us.
Ben Carlson recently asked the question, what comes after a good year in the stock market? How often do we see good years after good years?
He shows that good years tend to cluster in the stock market – it happens more often than you think.
This chart shows all the double-digit up years that were followed by double-digit up years, since 1928:
As Ben points out, these clusters span 42 years in total, which is more than 40% of the time. It’s pretty common!
But of course, sometimes bad years come after good years.
There are 16 examples of this happening over the past, almost, 100 years.
The median gain in the year following a gain of 20% or more is 11.4%, not far off the long-term return of the US stock market.
So, if forced to make a prediction for the year, it is; there’s a decent chance that the market goes up this year, but it might go down.
Either way, it doesn’t matter. As we always say, we don’t know what will happen next but we have a very good idea what will ultimately happen.
Companies will continue doing what companies do. They will continue to be the vehicle for the miracle of human ingenuity. They will continue to be the most effortless wealth compounding thing that was ever made available to mankind. They will refuse to lose money for any length of time, husbanding their cash when times get tough. They will continue to protect and grow our capital.
To finish, the world feels dark. The darkness seems to be gathering. As shareholders, we don’t feel worried about it. We have all of the best CEOs on the planet working on it – not just working on it, but working for us.
You never have to fear – the plan we have in place for you is going to work, it always works.
“If you think the market is high now, wait until you see it in 20 years.”
To finish, here is your reminder that the only thing that really matters is our health - and sadly, it often takes not having it to realise it. Make 2024 the year you invest in your health over everything else.
Best
Georgie, Guy and Danielle
georgie@libertywealth.ky
guy@libertywealth.ky
danielle@libertywealth.ky