2022 Q4 Newsletter
“I told you so!”
Don Davey
As inflation surged to a 40-year high in 2022, the S&P 500 fell by as much as 27% in October before recovering to finish the year lower by about 19%, ushering in a bear market — by my count, the 18th since the end of World War II. And while bear markets are always unpleasant, we Spartans recognize them for what they are: inevitable, yet temporary setbacks on our journey toward permanent wealth accumulation.
To me, the story of 2022 wasn’t so much about a perfectly normal market decline that occurs, on average, once every five years. It was more about the vindication felt by intelligent investors everywhere as, one by one, the investing fads of the pandemic era imploded, validating our low-cost, tax-efficient, globally diversified, patient, and disciplined strategy. And since it’s been awhile since I’ve paid homage to Walt Whitman by sounding my barbaric yawp over the roofs of the world, feel free to join me in a chuckle as I rattle off some of my favorite “I told you so’s” from 2022:
Ignore the Noise. On December 31, 2019, the S&P 500 closed at 3,230. Over the next thousand-plus days, the entire economic, financial, political, medical, and geopolitical world entered a period of chaos. Yet on December 31, 2022, the S&P 500 closed at 3,839, nearly 20% higher.
The Death of Crypto. On November 8, Sam Bankman-Fried (“the next Warren Buffett”) claimed to have a $15.8 billion cryptocurrency empire. When his company FTX filed for bankruptcy three days later, it was valued at $0.00. Crypto does not meet DEM’s investment criteria.
Growth Stocks Don’t Always Grow. US large-cap growth stocks such as Facebook, Apple, Netflix, Google, Tesla, Zoom, and Peloton all soared to ridiculous valuations as the world emerged from the pandemic. All have since cratered while our boring, beaten-down value stocks have roared back to life. Diversification is always the best strategy.
ESG Introduces Risk. Despite mountains of statistical and logical evidence that they aren’t effective, environmental, social, and governance (ESG) strategies became all the rage over the past few years, especially among institutional investors. After significant underperformance by these strategies in 2022, investor enthusiasm is finally waning.
Bonds Carry Risk. Until this year, investors had experienced a 30-year decline in interest rates from 20% down to 0%, masking bonds’ hidden risks. However, as the Federal Reserve swiftly increased rates from 0% to over 4% to battle the highest inflation in a generation, the seemingly safe US aggregate bond market index cratered by nearly 20%. The only bonds that held up well during this carnage were short-term, high-quality bonds such as those we set aside as Bear Market Reserves for our retirees.
Speculators who got caught up in any of these fads were taught some painful and expensive lessons in 2022. But not us. Not on my watch. We Spartans are long-term, goal-focused, plan-driven equity investors. We believe that lifetime investment success comes from continuously acting on our Plans. Likewise, we believe that lifetime investment failure comes from continuously reacting to current events.
So while others wasted time worrying about interest rates, inflation, the war in Ukraine, the mid-term elections, the economy, the markets, or the latest investing fads, we Spartans focused on funding our portfolios, tapping our bear market reserves, reducing our tax bills, updating our estate plans, paying off our mortgages, lowering our insurance premiums, funding our 529 plans, and donating to our favorite charities. As we enter the unknown of 2023, we will continue to control what we can control and completely ignore everything that we cannot. Our Four Pillars remain unchanged: Plan Wisely, Diversify Broadly, Invest Intelligently, and Ignore the Noise.
Please look for your invitation to DEM’s 25th Anniversary Celebration on Friday, June 23, 2023, at the Margaritaville Resort in Jacksonville Beach, Florida. Trust me, you won’t want to miss this! And we received notice that our TD Ameritrade accounts will officially convert to Schwab accounts on Tuesday, September 5, 2023. Rest assured, we are doing everything in our power to ensure a completely seamless transition.
I am truly blessed to serve as your family’s trusted advisor and to have such incredible human beings as my DEM Spartans. Happy New Year!
Don Davey
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise
