January 2022
My wife recently reminded me of something that is often said to first-time parents, "the nights are long but the years are short." Those first few weeks of parenthood are certainly tense as you focus on every feeding, nap and diaper change. Sometimes, in the midst of it, you might think ahead to what the little bundle of joy will be like in the future, but then it's back to watching for that first word or crawl or step, as well as the first time the baby sleeps through the night.
In investing, starting a new year can feel like the beginning of a new chapter. After we look at how a portfolio did in the preceding year, we focus intently on how the portfolio is set up for the year to come. What changes do we need to make as we take into account the economic, political and cultural forces that the world may encounter as the calendar turns? In the beginning of January, the end of the current year seems far away just as the parents of a toddler have trouble imagining how their child will one day be a teen off to college and adulthood. But even as a review of investments is worthwhile at year-end, one should not get unduly lost in short-term concerns or take too seriously the annual parade of "things to worry about in 2022" articles that the financial press loves to publish. Every part of every portfolio should of course be durable enough to withstand changing circumstances but it is more important to look at factors that could change what a business is worth over the long term rather than obsess over a change in the calendar.
One critical difference between the role of parent vs. investor is that if a particular stock comes to disappoint or underperform, you can very much disown it. You can even toss aside a perfectly decent stock if something markedly better comes along. A parent should not do this! But creating and then managing an investment portfolio requires that each component stand on its own and add value and diversification to a portfolio. It is not enough to "set it and forget it." It's a difficult balance, to invest for the long-term and yet consider how much to weigh the current situation with respect to a particular business or industry and judge how current circumstances will affect the long-term value creation we are all after.
The first two weeks of 2022 have seen the macro concerns of higher inflation and rising interest rates, combined with monetary and fiscal tightening, generate a headwind to most stocks, particularly technology stocks that have done so well over the past two years. Non-tech value stocks have done better, but even they are not immune from a changing of the economic backdrop. The hope is that a growing economy will keep cyclical, industrial and financial company stocks going up but the issue remains that interest rates rising too quickly can derail an economic expansion. The temptation is to throw up one's hands and do nothing or sell indiscriminately. But both of those approaches would be undisciplined.
A better approach is to analyze an investment portfolio's overall balance, diversification, and cash, and then see if the portfolio, considered as a whole, aligns with the economy we are most likely to see over the next few years. Often the biggest positions in a portfolio have grown in relative size because they are in fact best positioned to prosper in the years ahead. But occasionally market exuberance carries stock prices of even the best of companies to unrealistically high levels. As I often tell clients, you don't want to rest your fortunes on a mountain of quicksand. The idea is not to sell "winners" but to sell or trim a position that has exceeded a realistic appraisal of its worth, after considering the tax ramifications of selling. It may also be time to sell stocks that simply have not created the value they were expected to. Prudent selling creates cash to seize on new opportunities that can be created by the indiscriminate selling we often see at economic inflection points.
When an investor adds a position to a portfolio there is a tendency to fret over every price swing for the first few days. Did I buy too early or not enough? But good purchases are dictated by good judgment on long term value compared to the current price. If you make sound decisions, over time, on what to keep and what to add, as the years pass you will be left with the meaningful wealth that can be created by thoughtful investing just as the new parent, after the first few months of sleepless nights can, over the years, bring up a child and experience all of the joy and satisfaction parenthood can bring. In parenthood and investing, patience and good judgment will pay off in the end.
Have a great 2022!
