Lessons From the Bear Market

The S&P 500 hit an all-time high today. It hasn’t done that since the first trading day of 2022. That’s 512 trading days and 747 calendar days. Just over two years.

By historical standards, that wasn’t so bad. It didn’t feel great, but a two-year bear market is as normal as a blizzard in the northeast. They’ve happened before. They’ll happen again.

Now that the bear market is officially over*, I wanted to reflect on some of the lessons we learned to prepare us for the next time one appears.

Stocks don’t fall for no reason 

It’s easy to look back and say that you should have loaded up with call options or 3X bull ETFs or whatever, but bear markets are scary! It’s never obvious while you’re in them that it’s a massive buying opportunity. Morgan Housel said “All past declines look like an opportunity, all future declines look like a risk.

We did a podcast in December of 2022 at the Nasdaq MarketSite in Times Square with our friends from the On The Tape podcast. At the time, things were…not great. Inflation was skyrocketing and the fed was chasing after it to slow down consumer prices.

The stock market was cratering. And the ones getting hit the hardest are the ones everyone owned. Amazon was 55% off its high. No really, 55%. Meta was worth just one-third of what it was in the previous year. Fear was everywhere.

I asked the audience, how many of you expect a recession in 2023? Every hand in the room went up. Then I asked, how many of you think the stock market bottomed in October? Crickets.

It’s easy to say “Be greedy when others are fearful.” It’s hard to actually do it.

Businesses are good at creating value for their shareholders 

On this week’s TCAF with Adam Parker, we talked about how incredibly well-run companies are today. To be specific, I’m talking about the biggest businesses that we as investors are lucky enough to invest in basically for free.

The top 20 companies have compounded their earnings at ~13% a year for the last five years.

Stocks don’t go up every year. Earnings don’t go up every year. But capitalism is undefeated. It’s important to not to lose sight of that when we’re drowning in negativity.

Know your risk tolerance

It’s easy to overestimate your ability to deal with downside risk when stocks are going higher. You only discover who you really are as an investor in bear markets.

Ben and I were getting dozens of emails about triple-leveraged ETFs in 2021: “I know it’s risky but I have a long time horizon.”

I don’t think we saw a single one of those messages hit our inbox (personal emails, personal responses) in 2022.

The takeaway from all-time highs is not to only invest in stocks. The lesson is to own only as much as you can stick with when the going gets tough. The best investors balance their ability to deal with pain with their ability to sleep at night.

Automate your investing

Investing has never been easier.

I, like many of you, just kept buying over the last two years. It’s not because I’m a genius, and it’s definitely not because I was bullish with every purchase. I bought in my 401(k) every other week and in my brokerage account every month because it happens automatically. Out of sight out of mind.

If I had to physically log on and execute these trades, I’m sure that I wouldn’t be as consistent as I have been. You mustn’t let your emotions determine when you buy. Like Nick first said back in 2017, Just Keep Buying.

Bear markets are no fun, but they’re part of investing. I’m gonna enjoy this bull market for now. No telling how long it’s going to last.


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