January brought a much-needed bounce to stock portfolios, rising about 5% on the S&P 500 and around 10% for the tech-heavy Nasdaq. Major indices finished 2022 down around 20% with many stocks experiencing much deeper declines as investors grew more and more bearish. So, as prices began recovering to start the year some stocks soared dramatically when traders who shorted them rushed in as buyers to cover their position. Economically, not much had changed over the past 30 days, and yet this price action was all too normal for investing and for human behavior. Since stocks prices are set by traders’ future expectations this inherently leads to speculation and volatility. As we can all attest, humans are by and large impatient. We also have inherent biases that guide our actions. We might think we have a great idea, one that we put lots of time, effort, and thought into and then quickly abandon if it doesn’t immediately yield results. We are fickle and quick to extrapolate what we have just seen into long trends. Unfortunately, these deeply ingrained instincts can get in the way of our long-term planning and goals. The instant feedback loop of the stock market is hardly useful except to a small minority of traders with the skill to capitalize on the price action and consistently win. Every price movement can feel like a compliment or criticism of our decisions, clouding our judgment and resolve going forward.
As long-term investors, the daily price quotes that provide instant gratification or humiliation are actually of little value and have almost nothing to do with the long-term quality of our decisions. It is possible to make terrible decisions that result in terrific short-term returns and vice versa. There is no perfect method to combat the harm of instant information from the financial markets. Value investors who internalized the teachings of Benjamin Graham and Warren Buffett waited over a decade for their thesis to play out last year. It’s important to zoom out and remember that healthy portfolios are built to withstand and profit throughout many market cycles. Whether markets are ripping higher or slumping lower it is always best to mentally slow down and anchor to something psychologically other than daily price quotes. Trust in the process of consistently saving and investing. Don’t deviate if motivated by greed or fear. Many times, we have seen an investor or hedge fund go bankrupt because they borrowed money and chased returns on the way up and got caught overexposed on the way down or shorted a stock on the downside only to see conditions improve and the stock move higher. We may be preaching to the choir, but these tenets of investing are not well understood or rather not well internalized. Humans will always overvalue instant feedback because it was necessary for our survival evolutionarily. It is up to us to have the discipline to understand when instant feedback is useful and when it is meaningless noise distracting us from our long-term goals.
In the meantime, enjoy the returns of the past month but check yourself if you start thinking stocks only go up. Also check yourself if you are still reeling from the hangover of last year, thinking stocks are dead. Easier said than done.