January 28, 2022
Going back nine decades, the first 16 days of 2022 were the worst start ever, with the S&P 500 dropping 11%. (1)
But that depends on how you define "worst."
Of all the bad ideas in investing, and there's a lot of competition, "high water mark" investing must take a spot on the podium.
High water mark investing is a term I invented. It is not yet a meme, but I'm patiently waiting. When you high water mark, you look at your accounts a lot, and you think your net worth is equivalent to the high point of your account balances. This is wrong on so many levels.
Markets are going to overshoot their fair value. Sometimes by a lot. You can't assume that the overshoot means long term value was created. Remember Gamestop last year, about this time, trading at $325 / share? Remember the revolution of unemployed day traders going to storm the gates of The Citadel hedge fund using an antiquated video game retailer as their vanguard? It was fun! But at $92 per share and falling, it appears the revolution has moved on.
Psychologically it's bad to assume your net worth equals the high water mark.
When markets correct, sometimes known by the more colloquial term "fall" or "lose money," it just means investors are stepping back and reevaluating fair price. If you are selling shares in retirement for cash, admittedly you wish this part of the process could be skipped. But for an investor who is earning and investing, this reset back to value is good. It's even better if the shares fall below their intrinsic value, because then you get to buy something on the cheap.
When you buy something like a car or a house, you do not think "Please go up in price so I can pay more." You think "I'm putting on my best negotiating pants and I'm getting this sucker down." You look in the mirror and say "Today I am dangerous." Think the same way about the market - if it's rising, and you're buying, you are losing. You are paying more for ownership of future cash flows. Cash flow is the prize.
If you own an individual stock position, it's likely swinging even more than the indexes. Plus or minus 30% on an individual stock in a year is completely normal, and if you don't feel comfortable with that type of variance, you shouldn't own it. This is quite different from owning an index, as indexes are averaging hundreds of thousands of positions. In addition, indexes don't go to zero, which individual stocks do all the time. See our page here for individual stock picking.
Dan Cunningham
1. Source: Bloomberg 1/24/2022
2. This was all quite fun to watch, in large part because it took the hedge funds about 5 microseconds to get in on the long side of the trade as well. Regardless, I was kind of rooting for the little guys. Luckily decades of experience have taught us Internet message boards sometimes spread untruths and therefore the clients of One Day In July sat out this particular revolution.
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