What an amazing two months it was to end 2023. The market indexes rose in price by 14-21% (depending on which index one looks at), after dropping in price significantly between August through October. In fact, virtually all indexes have regained all of their lost ground during the market correction that began in November 2021.
Starting the new year seems like an excellent time to review some of the basic tenets underlying our Serious Money ApproachTM . You may be a relatively new reader of our newsletters and learning these First Principles for the first time, or you may be a long-term client getting a refresher lesson. So, given the big drop in 2022 and the big rally in 2023 as our context, let’s review:
Serious Money Principle #1: Faith in the Future
What this means to me is to trust that, although I don’t know how current problems will be solved, they will get solved.
For example, in November 2021 when we first learned of cargo ships stuck in our harbors unable to unload their supplies, followed by the supply chain crisis, rising inflation, and rising interest rates, we didn’t know how we would fix these problems. But here we are two years later with a recovering economy, profitable companies, and rising stock prices.
This is but one example of dozens I have witnessed throughout my 40+ year career as a financial advisor.
Serious Money Principle #2: Patience
What this means to me is to trust that, although I don’t know when the current problems will be solved, they will get solved.
I didn’t know if the 2021 problems would take 3 months or 3 years, but I knew that I could trust the great companies of America to work on the problems, figure out workarounds, and use our human ingenuity to innovate around the problem.
And so it took about two years to get us back to where we were at our all-time high water mark.
Serious Money Principle #3: Discipline
What this means to me is to stick with what has always worked and avoid trying something new just because others are thinking and saying “this time is different.”
Here are some examples of sticking with what has always worked in the face of the “this time is different” problems that began in 2022:
- Treat a market downturn the way we treat Black Friday sales. That is, we instinctively know to buy more of stuff when its prices are slashed 20% or 30%. But it goes against human nature to buy more shares of our holdings when prices have fallen. Discipline means acting against our human instinct because we all know that we should “buy low sell high”.
- A corollary is to avoid selling shares when prices have dropped. Again, our human nature to sell after a price drop out of fear of further price drops. But we all know we should be buying low and not selling low.
- Add deposits to our holdings every month, if possible. We all do this with our 401k plans at work, when a piece of every paycheck goes to our 401k and we see how much accumulates over the years despite the continual ups and downs of the market.
- Remember that price and value are inversely correlated. This means that when prices are lower the value of your investment is higher because one would expect a bigger return having bought at a lower price. Conversely, when prices are higher the value of investment is actually lower because there is less room for future growth.
This is why we use our Target Strategy to take profits off the table after a good long market advance. The Target Strategy is really just a variation of “buy low sell high” that translates more like “take advantage of lower prices and don’t get carried away when prices are higher.”
To a profitable and prosperous new year. Until next month, JR