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Investing can be absolutely brutal. In fact, I can say with a high degree of confidence that the “current” investing environment is by far and away the most challenging that I’ve experienced. However, that was also true during the lows of the GFC, during the European Sovereign Debt crises, the (original) Taper Tantrum, Brexit, Fed induced euphoric markets, Covid and numerous Geopolitical conflicts. A new record each time.
If we could invest with 20:20 hindsight, then our job would be so much simpler, but it just doesn’t exist. Much of investing is about extrapolating into the future and envisioning how we expect a business to look 5 or 10 years from now. There is inherent uncertainty – there’s no such thing as a free lunch. To earn a return, you must be willing to accept some form of risk. Usually, the more risk you are willing to take, the higher the possible return. However, the flipside of that coin is that it also increases the chance that your investment will lose money. Often, the riskier it is, the more you stand to lose.
Ultimately, the goal is to protect your downside.
In this post, I will look at some lessons that the market is urging us to learn from the current investing environment. I am always cautious about drawing conclusions from graphs, since often, by changing the timeframe and selecting a different start/end time point, one can be led to draw completely different conclusions.
By “picking” particular asset classes/sectors, I will demonstrate the best lessons I believe need to be learnt from the current environment. These lessons are timeless. They were just as true 10, 20, or 50 years ago as they are today, though they have (probably) moved to different sectors/asset classes as the years passed. Investing is tainted by behavioral biases (at least in the short term), meaning that all the theory in the world, on its own, cannot adequately prepare you for real life experience in the market.
Note, in this post, I am specifically focusing on past performance and not making any sort of projections into the future or looking at current valuations. By looking at the past as a guide we will understand timeless lessons of the market.