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Weekend reading: First they came for the growth stocks?

Weekend reading logo

What caught my eye this week.

For the past few years, being an investor in disruptive growth companies has been easy.

There’s been the odd hiccup – a tantrum in late 2018, and of course March 2020 when everything not nailed-down was sold in a panic.

But mostly, you just got richer every week.

Perhaps the biggest challenge this cycle was seeing your go-go shares only rise 5% in a month, while some meme stock jumped 300% and a crypto asset you’d never heard of rose 10,000%.

Bull markets don’t just make everyone (seem like) a genius.

They make greedy geniuses, too.

But investing in shares on ever-higher valuations is a game of chicken.

Even if you’re a fundamentals-based investor (like me, la-di-da) who buys into businesses, not stock charts, the market will eventually call your bluff.

You may own firms with fabulous futures, but one day they’re going to look about as appetizing as chlorinated chicken sounds. They will be tossed overboard indiscriminately.

The greatest multi-bagging companies – Tesla, Amazon, Apple – saw their value plunge 50-90% on their way to trillion dollar valuations.

It’s a matter of when, not if.

Under pressure

Friday was one such day. Which was remarkable, because Thursday had already seemed like one such day.

I’d actually messaged The Accumulator a screenshot from my portfolio tracking spreadsheet on Thursday showing how much the growth portion of my sprawling portfolio had been roiled.

But then came Friday, which guffawed: hold my beer.

Not one but two of my shares fell more than 25% on Friday. The worst was down 40%. Many of the rest were down at least 5%.

And we’re not talking tiny fly-by-night stocks. My biggest plunger, Docusign, was worth more than $50 billion a month ago.

Here’s how a random selection of growth companies fared last week:

Of course all of these companies – with the arguable exception of Meta (nee Facebook – have looked super-pricey for the past couple of years.

And there’s a definite ‘de-digitalization’ theme among the companies that have been faring especially badly.

Even as Omicron has loomed, the so-called work from home stocks that were winners in the locked-down world have proven too pricey for some tastes. Especially with higher interest rates on the way.

I wrote last month about how inflation expectations have been getting stickier all year. That had suggested Central Banks will need to tighten financial conditions sooner or more severely – or both. And that’s potentially bad for growth stocks because of the impact on discounted cash flows that I flagged up a few years ago in discussing the problems with low interest rates.

Twelve months ago, fanciful commentators were opining that paying multiples of 50-times a company’s sales (that’s revenue, not profit) was the new normal.

And it was – in that everyone was doing it.

Until they weren’t.

Another one bites the dust

Obviously I can’t sound too smug. As I say, a good part of my portfolio was pummeled this week.

I’ve been trimming growth exposure for much of 2021 on the back of re-openings and scary multiples.

But clearly in hindsight I kept too much and – hilariously – I’d even bought back some fallen high-flyers because they had begun to look tempting.


However this is not my first rodeo. I know shares in growth companies can look too expensive for years in a bull market, and I was happy to book the gains in the good times. A kicking was coming someday. The snag was I didn’t know when.

But will the legions of new investors who only began trading in 2020 and have never seen a bear market be so sanguine?

Thursday and Friday felt like a panicked liquidation – of traders on margin, if not of actual funds – but at the index level prices only dipped a little. This was a very localized earthquake.

There’s a lot more selling to come if people truly get the fear.

Of course, as I alluded to above much of the fastest money has moved onto trading cryptocurrencies.

Doubling your money in a growth stock in a year was a snooze-fest for Boomers by comparison to alt-coins and the like.

I wonder what such traders made of the past 24 hours in crypto prices on checking their screens this morning:

Come back plunging growth stocks – all is forgiven!

It sure looks like the euphoria is over.

Don’t stop me now

If you’re a passive index fund investor then you’re entitled to feel pretty good about all this.

For UK investors, the Vanguard World Index Fund was down less than 1% in the week.

It actually rose on Friday!

The mega-tech companies that dominate the market (Alphabet, Microsoft, Amazon and the like, though not Meta) have barely wobbled so far.

Passive investors also save themselves a lot of grey hairs by avoiding days like Friday – albeit at the cost of rarely being able to brag about your returns on Twitter.

Most people will do much better with index funds than stock picking, which is why we recommend passive investing so much on Monevator.

But I wouldn’t get too complacent.

An interesting feature of the recent sell-off is that it’s occurred while the all-important US ten-year yield has actually been softening.

Indeed market expectations for US interest rates are flattening across all maturities recently.

Say what?

Basically, as of recent days, the market is seemingly expecting US interest rates to rise less in the future.

That could be because it foresees another recession, maybe virus-driven.

It could be because it’s thinking that inflation is more transitory, after all.

Or it could be that bond investors are growing increasingly fearful in general, perhaps due to the same flight to safety instinct that drove the mass dumping of expensive growth stocks this week.

After all, if you expected Omicron to lock us all inside again, then the likes of Zoom Video should perhaps be rising.

So there’s some circles to be squared here.

I could speculate about this all day but it’s not really our beat.

Suffice to say we’re potentially in one of those periods of dislocation for the markets, where things change and it only looks obvious how in hindsight.

It had seemed like stock markets were getting ‘healthier’ in 2021.

Last year’s returns were dominated by the biggest companies. But the spoils had been shared more evenly recently, as Morningstar reported:

Will this continue?Maybe the recent sell-off is evidence of investors coming to their senses, as value investors might put it, and dumping their growth shares for solidly profitable companies?

Or is a new bear market coming – taking out the easy targets before moving on to the biggest prey?

Who knows. Anyone being too defensive has made a mistake for most of the past ten years.

I was too exposed to growth stocks in partly because the end of the year is usually so strong, and the outlook seemed favourable until a fortnight ago. Things can change quickly.

Who wants to live forever

We’re all playing a long-term game. As an active investor, I believe I can outperform the market by discerning the best companies that will prosper over the next 5-10 years (albeit I shuffle my cards continually, which is heresy in the circles I hail from).

I even bought some growth shares on Friday – buying into boutique cloud provider Digital Ocean and adding to old favourite Mercadolibre (the so-called ‘Amazon of Latin America’, only not that Amazon…)

These still look like long-term winners to me. But in the short-term anything can happen.

Meanwhile for passive investors, the best defense is and always will be diversification. Even steep crashes will eventually look like blips provided you’re properly diversified and can hold and add through such declines.

Because a time will come – maybe next week, maybe next decade – when the sort of falls growth stocks ‘enjoyed’ on Friday will occur at the index level.

The S&P 500 will be down 8% in a day. The FTSE 100 will be off double-digits.

It’s always inconceivable until it happens. But it does happen.

Maybe this week was the market re-calibrating for a long expansion ahead. Perhaps the old companies that burn and bash stuff are due some time in the sun.

The bull market is dead – long live the bull market!

Perhaps, but I fancy it still isn’t a bad time to make sure you’ve got the right balance in your portfolio for navigating whatever comes next.

Have a great weekend.

[continue reading…]


What your retirement could look like

A hazard warning sign that says “Old Age Ahead”.

Anyone planning for financial independence (FI) knows it’s hard to picture your life in retirement. Like a precog from Minority Report, you can only glimpse fragments of your future.

However we’ve uncovered intriguing research that might help you fill in the ‘Here Be Dragons’ gaps in your FI map.

The research – Retirement Living Standards in the UK in 2021 – plots three tiers of retirement spending, ranging from minimal to moderate to comfortable.

The paper also serves up insights into what kind of lifestyle that spending really buys, from people already living it.

Much ado about much more than nothing

Retirement research gives you a shortcut to answering that perennial awkward cocktail party question: How much do I need to retire?

Okay, maybe it’s only us who invites those sorts of questions…

Anyway instead of doing laborious calculations on a spreadsheet, you could just pick one of the consensus retirement income answers published by the Pensions and Lifetime Savings Association (PLSA).1

An unexpected bonus of the research is it also incorporates testimonies from retirees and near-retirees drawn from various socio-economic backgrounds and regions across the UK.

If our retirement future is an unknown country then their words act like an audio tour guide.

It tells us something about what really matters to people in retirement. And as ever, the experience of others might help us find our own path.

Plus it’s an interesting read because there’s nowt so queer as folk.

OK, let’s start with the hard data. We’ll then move on to the fluffy anecdotal evidence.

Retirement income standards 2021

A table of retirement incomes for three lifestyle levels: minimum, moderate and comfortable
Source: Retirement Living Standards 2021, PLSA

This table is a bronze, silver, and gold rostrum of annual retirement incomes – as determined by members of the UK public aged 55 or older.

The underlying research explains what you get for your money at each level. We’ll come to that shortly but – spoiler alert – the Minimum lifestyle isn’t factoring in many trips to Ayia Napa.

What’s also not clear from the table is the income numbers are after-tax.

An interesting contrast is the UK median household disposable income2 of £29,900.

The median retired household income is £23,557, according to the ONS. That’s well below the Moderate spending level for couples in this table.

Note that the PLSA expects the State Pension to do much of the heavy lifting in retirement. Especially at the Minimum standard.

This is the single biggest reason why nobody should fear the State Pension being done away with. The social fallout of scrapping the State Pension would be catastrophic for any government.

What really leaps out from the table is how expensive life is for singletons.

The most effective cost-saving measure any retiree can make is to couple-up. No wonder there are so many senior Casanovas out there.

Be sweet to your significant other and keep ‘em healthy. Give flowers, not chocolate. (But think twice before buying them a Peloton!)

The table also invites us to compare our own retirement prospects with the PLSA’s pecking order.

To understand the life of Riley promised by each level, feast your eyes on the next table…

What you get for your money

The three retirement income levels broken down into spending categories

There is much social division written into the curt lines above.

For example, I struggle to imagine life without a car. Then again I don’t need three weeks in Europe per year.

I also know plenty of people who substitute time and talent for money when it comes to gift giving.

You’ll draw your own conclusions. I’d love to hear them in the comments.

While the table forces a statement of spending priorities, the reality is that many of us will drift back and forth across the tiers.

For example, The Accumulators spend less than the Minimum on clothing. We’re in the Comfortable zone on food, though.

Meanwhile our overall budget is closest to the Moderate camp, albeit we undershoot.

Retiree vox pops

What I love about this research isn’t the numbers, however. It’s the voices.

The participants discuss their lived experience for each major spending category.

A portrait thus emerges of retirement reality, painted in the primary colours of what money can buy.

The anonymous quotes below are excerpts from the study’s group sessions.

Food spending

A snapshot of the food spending category for the three retirement incomes

The snapshot above shows the foodie living standard each income band affords. The major difference is eating out and takeaway:

  • Minimums: £45 per month
  • Moderates: £200 per month
  • Comfortables: £533 per month

The Comfortables are clearly loading their plates with much more spice of life than the Minimums. 

At least on the surface.

One of the things the FIRE community has been great at is uncovering ways to enjoy life without throwing money at it. 

In my 20s I spent like The Comfortables on eating out. It was how I lived the life. Now I’m under-spending The Minimums and I’m happy with that.  

Others will think differently. Social eating has shot up the priority list of many after lockdown, as encapsulated by this quote:

I hadn’t realised how important it is for emotional well-being and so on, just the act of sitting down and breaking bread with friends and family, so … I guess what I’m saying is I think that … once Covid has finished, that’s going to go up because a lot of people have realised how important it is.

Moreover, financial flexibility is an important part of social inclusion:

…at one time eating out would have been seen as luxury but to have … take part in society and be … have a reasonable standard of living, you would have to include things like this, wouldn’t you because it’s … not … essential’s the wrong word but it’s part of what it is to be in a modern society isn’t it?

As a lean-FIRE-ee I sometimes wonder if I’ve cut my cloth too tight on this score. We’ll see.

Housing spending

Minimums pay social housing rent. Moderates and Comfortables are assumed to have paid off their mortgages by retirement.

But today’s retirees don’t think the next generation will be so fortunate:

I was just going to say that in my experience at least, the expectation of certainly people in their 30s and 40s, which my kids and nephews and niece and so on all are, very few of them have an expectation now that they will own their house by time they’re 50 or 60.

Personally, I think we’ve fallen short as a country on this. It’s the height of hypocrisy to hoover up housing stock and lock future generations out of the market by failing to build.

The Generational Compact is a cornerstone of society. Earlier generations invest in their children’s future, and their children look after them in old age.

But we’re creating generational divides that put social cohesion at risk.

Meanwhile, up-and-coming generations are meant to bankroll the NHS, long-term care, State Pensions, and clean up the climate crisis. 

Back to retirement, and divorce looms large as a catastrophic roll of the dice in the game of housing snakes and ladders:

…the thing is though I’m in a position where for lots of reasons I… I have to rent, so I have to share a house with somebody… you can’t always guarantee that you’re going to end up owning your own house because circumstances change and things happen don’t they, and people get divorced and have to split their resources and all that sort of thing, and more and more people get divorced after retirement because the fact is when people suddenly find they’ve got to spend a lot of time together…

Divorce is sometimes mentioned in Monevator comments as a third-party calamity. But reading a first-hand account really drove home the awfulness of the situation to me. (Excuse me while I google ‘thoughtful gifts’.)

Speaking of unhappy endings that I’d rather not think about…

Body disposal etiquette

I’ve paid scant attention to funerals. But our focus-grouped retirees have, and they’re very pragmatic:

I think for me, a funeral you know is my party that I’m not actually attending, except (laughs) in a dead fashion! And I’d rather spend the money on you know allowing people to have a good time, without all that money spent at the Co-op, on a box which is just going to be burnt.

I think it’s a logical extension of the country’s descent into … or ascent, depending on your perspective, into being agnostic or atheist that you know it’s the last pillar that’s being kicked away in terms of you know the death ceremony and some official presiding at it, and you just don’t … you don’t need that anymore.

Worst case scenario, you can just donate your body to science and you’re not paying for anything at all, are you?

The retirees have built pre-paid cremation plans into the Moderate and Comfortable budgets. But they’re also tempted by adverts for services that skip the church, cars, and wake.

Thankfully those ads aren’t showing up on my feed yet.

Mrs Accumulator is under instruction to pop me out with the bins. She says she will put me in the freezer so she can still chat to me.

We’re gonna need a bigger freezer.

Health issues

In another ominous sign of the times, some contributors voiced their fears about being able to get medical treatment when they need it.

[A] health plan is probably becoming a necessity, it’s certainly something that I have started actively worrying about … getting any kind of appointments with GPs, dentists, and when you hear about the long, ever increasing waiting lists for NHS, it’s certainly playing on my mind…

I suppose it’s just the way I’ve been brought up, but I’ve always thought of private healthcare as a luxury. It may be that the situation, the circumstances for all of us are changing so that that needs to be revisited…

Mrs Accumulator and I had the same conversation, triggered by the Covid deluge.

Ultimately, private healthcare wasn’t included in the retirement budgets this time around but for how much longer?

Funding the NHS feels like another slow-moving car crash that we’re not grappling with as a society.

Are we prepared to pay more in taxes? Do we help relieve the burden on the NHS by looking after ourselves more? (By which I mean living healthier lifestyles that increase our chances of staving off chronic conditions.)

All the private health insurance in the world won’t save us from dying if we need urgent medical assistance but have to wait five hours for an ambulance.

Social and cultural participation

The social and cultural participation spending category broken down across the three retirement income levels

Comfortables are spending 150% more per person per week on leisure activities than The Minimums. The potential impact of that spending power on a life well-lived is captured in this quote:

Sociability is such an important factor for well-being … sociability and connection and belonging, which is so important for mental health and continuing…

That said, the interviewees also talk about how Covid has forced a reassessment of spending needs in this area. For example, gym memberships have given way to running shoes, bicycles, and walking boots.

Early Mr Money Mustache was a trailblazer in rethinking life’s riches so they don’t cost a packet.

I’m not sure anyone has replaced him in that respect? Let me know who I’m missing in the comments.

The social participation category also includes tech. DVD players are clinging on but streaming is now considered an essential part of engaging with the world at every income level:

My partner, her quality of life would not be the same if she didn’t have Netflix … So these things … as I said, these things were a luxury but then they become a necessity in certain circumstances, don’t they?

Moderates and Comfortables get a smart TV. Comfortables get a bigger smart TV.

(We were warned against that escalation in the movie Trainspotting. Possibly not the best source of retirement advice.)

The contributors are prone to lifestyle creep:

…the other thing I’d say on your list is that at one time, HD TV was kind of like an exotic upscale from standard definition, but now HD is just very basic, and now 4K is becoming a minimum. So I’d say that you’re not far off now where 4K will be just your minimum and HD is already looking a bit old-fashioned.

That person is a marketeer’s wet dream. At some point your eyes can’t tell the difference! And your well-being certainly won’t.

Technical sidebar

Smart speakers are now included for Comfortables but not yet Moderates.

I do wonder how much tech is bought just because the neighbour’s got one?

Some retirees I know would be much better off if they could just get to grips with a smartphone.

I say this with my tongue in cheek after watching many a Boomer respond to a smartphone like a caveman faced with a mortgage loan application. 

On the other hand, I know a pensioner with chronic health issues who loves their smart speaker’s simplicity. They’re also greatly reassured that they can use it to call for help.

I’m sure there’ll be tech in the future that passes me by. Hell, there is now.

Regardless, if you enjoy keeping up with trends and aren’t keen on trade-offs, you should be planning for the Comfortable spending band.

“Hello Future Me”

Retirement is difficult to imagine until you get there. We plan it on colourless spreadsheets and emotionally struggle to relate our parents’ experience to our own.

Friendship groups tend to be intra-generational. I probably know more about the trials of my elders via Monevator than I do from real life.

That’s why I found the retirement thumbnails in this research so fascinating. It let me hear things that people don’t normally talk about.

So what have you got to say for yourselves? Let us know below.

Take it steady,

The Accumulator

P.S. If you don’t like the PLSA’s retirement income numbers then try the ones from Which instead.

  1. The PLSA is a financial industry group. It includes asset managers, consultants, law firms, and fintechs. They’re so keen to get Britain saving for retirement that they commissioned research from Loughborough University’s Centre for Research in Social Policy. []
  2. Disposable income is what’s left after direct taxes, such as Income Tax, National Insurance, and Council Tax. []

Buy the rumour, sell the news

Looking into the future with a crystal ball

A new investor has a thousand ways to be confused by the stock market. Hearing the old adage ‘buy the rumour, sell the news’ won’t help.

What on earth?!

  • Why buy shares when you’re not sure what’s going on?
  • Or sell when a great thing is finally confirmed?
  • Why be uncertain at all in 2021 – when the facts are just a Google away?

If you’re asking these questions, then you don’t yet understand how markets work.

Which is what makes this old instruction so – well – instructive.

Buy the rumour because the market prices forward

The basic idea here was as familiar to white-wigged traders swapping paper in 17th Century Amsterdam as it is to today’s meme stock chasers punting on Freetrade and RobinHood.

Buying the rumour is all about what is priced into a share – and when – and whether you have an edge against your fellow share sharks.

In theory, a share price reflects the market’s best guess as to the current value of all the cash that will ever come due to its holder in the future – with a discount applied for risk and the time value of money.

Of course, prices can be buffeted by emotions and fads. This is what we mean when we gravely intone how a share “has become disconnected from fundamentals”. Recall, say, the manic trading of GameStop in early 2021.

But most of the time, most of the share price in an efficient market reflects a best estimate of a company’s cash generation potential.

Granted, this theoretical truth is seen best in an economist’s model. It’s not always so apparent in the hurly burly of a real-life stock exchange.

Not least because the market is no single entity. There’s no godlike bookkeeper with one eye on Excel and the other eye on the newswires.

Rather the market comprises millions of individuals, funds, and AI algorithms churning billions of shares. There’s a wide disparity in aims and time horizons. There’s also a varied appetite for risk and reward.

Mr Market has many faces

Sometimes in aggregate investors are greedy, and will pay a lot for future cashflows. That leads to higher equity prices.

Other times they’re scared and prefer the certainty of cash in the bank. This reduces the general appetite for shares.1

Much of the time, very few market participants are seemingly doing any sort of discounted cash flow analysis or similar on those future earnings at all.

Instead they are chasing news. Or rising prices. They are buying because of an economic report or a release from a rival firm. Or a million more reasons.

A fund manager may pay more because it was sunny on the way to work, or because her database says a share is priced cheaply compared to history.

An investor may put money into Tesco because he just did his shopping there. He may buy on the rumour that a new gizmo is already selling out. He may sell on a hunch that a popular CEO is leaving.

Yet the object of most of this guesswork typically does have some bearing on future earnings. Okay, not that sunny commute maybe, but leadership changes or a smash hit product will impact the bottom line someday.

It all adds up.

You can think of a share price’s moves in the short-term as almost like the result of ‘Asking the Audience’ in Who Wants To Be A Millionaire.

Trades on a stock exchange are like votes cast with money.

Told you so

Sooner or later, any bit of guesswork is confirmed or refuted.

A CEO stays or goes. The hit Christmas toy sells out – or it transpires such rumours were a marketing stunt. Or maybe the toy does sell out, but only because they didn’t make enough of them. As a result the anticipated earnings boom never happens.

When millions of rumours are replaced by more knowledge in this way – whether through formal press releases, or by altering the profit and loss statement or the balance sheet in a firm’s reporting – mis-pricing begins to be corrected.

A bit of froth is taken off a share price here. Some gloom is dispelled there.

And so – over the long-term – share prices track earnings.

True, you may have to wait an age to see this. Think Amazon or Tesla.

Alternatively, the relationship between profits and a share price might be apparent quite quickly with a consumer staples company like Unilever.

Cyclical outfits such as miners typically see their share prices rise and fall well ahead of big earnings changes, like cats chasing their own shadows.

And did you notice I said ahead of earnings?

Wait for a cyclical company to confirm a downturn and you’ll probably have already taken a chunky loss by the time the news arrives.

Guessing ahead is the name of the game with cyclicals.

Buy the rumour to buy mispriced shares

Hopefully the adage ‘buy on the rumour sell on the news’ now makes sense.

If you’re trying to beat the market, you need to think and do something different to the market in aggregate, as represented by current share prices.

You might value a particular security differently.

Perhaps you’re operating at a different timescale to most participants?

Maybe you have a different attitude towards risk and reward.

(An apparent bargain price is often just a discount applied by the market to reflect the chances of something good and expected never happening.)

In any event, in most cases being able to anticipate something before it happens will be more profitable than waiting until everybody knows about it from an official news release.

Sure we can argue at the margins.

For example, the momentum factor’s history of out-performance may be due to investors taking longer than expected to properly incorporate new information – even when fully confirmed – into their valuations.

Meanwhile a lover of so-called quality shares like Warren Buffett or the UK’s Nick Train might argue the market systemically undervalues long-term compounded earnings generated by duller, more predictable companies.

I’m the sort of investing nerd who would happily debate all this with you in the pub, but that’s for another day.

Just make sure you grasp the main point before you look for exceptions.

Don’t be that guy

Don’t be like the talking heads on financial TV who every day seem amazed: “Monevator Enterprises shares soared after-hours despite reporting big losses”.

The market already knew that losses were coming. Investors expected even bigger losses. Or they didn’t appreciate a shift in the earnings mix. Maybe they like the new-news that the CEO is flogging off the loss-making divisions.

Or perhaps it’s one of a hundred other things.

“Why have my shares plummeted after Monevator Inc. reported record profits? The stock market is insane!” – say day traders everywhere, every day.

Perhaps the market is indeed slightly over- or under-pricing your shares. (It’s very unlikely to have the valuation right on the nose.)

Or maybe it has cottoned on to the fact that the surge in revenues at your company looks unsustainable.

That your company is juicing profits by under-investing.

Or a hundred other things.

If I had a drink for every time I’ve heard media pundits or online posters bewailing an ‘irrational’ market that in fact was looking months or years ahead – and long before you were – then I’d be checking myself into the Priory.

Not least because I’ve bewailed like that myself, too.

We’re all only human.

Buy the rumour, sell the news

Remember, the stock market is a forward-looking prediction machine. It tries to discount the value of what it sees through the mists of time ahead via today’s share prices. It’s doing this all the time.

You’re probably best off not trying to do it better than the millions of smart people and machines that make up the market.

Invest passively, buy index funds, and benefit from their hard work.

But if you must play the crazy game of active investing, stop obsessing over what everyone already knows – or what they think they know.

Think different, and before they do.

  1. You can see this in varying CAPE ratios over time, as investor fear and greed ebbs and flows. []

Weekend reading: Many shall fall that now are in honor*

Weekend reading logo

What caught my eye this week.

Today would be embarrassing if Monevator was an old-fashioned print magazine (as opposed to an old-fashioned ‘weblog’!)

I’d be scurrying past the newsstands. Trying to avoid my cover story – already written by Wednesday due to magazine print deadlines – about the bull market disguising how last year’s mega-winners had cratered in 2021.

That post looks less topical this Saturday morning. Because in case you hadn’t noticed – in which case, collect your merit badge from The Accumulator by the door – markets were roiled on Friday by fears of a new Covid variant that seemingly has just been spun-up in someone’s body-lab in South Africa.

This ‘Omicron’ variant has more mutations than a Chernobyl-era chicken, and on the surface a transmission rate that makes Delta look about as speedy as an epistolary 18th Century love affair.

The City fears it’s seen this movie before. So traders have dumped first, and will ask questions over the weekend. At least the potential for a speed bump in that bull market, then.

To only rub salt into the wound, this was also the week I decided that the ‘Covid corner’ section of our weekend links had run its course. Oops!

Turn, turn, turn

In some ways though Friday’s reversal of fortune amplified the point I was set to make. Which was that nothing – ever – lasts forever in the markets.

If you’re a halfway active investor, you’ll remember that lockdown darlings like Zoom Video and Peloton were recently all the rage. Their shares skyrocketed while fund managers and everyday traders were using their products every day.

But as Will Hershey on Twitter recounts via a handy table, such shares – lauded as inevitable winners of a work-from-home revolution – have since crashed 35-70% from their highs.

On the Compound Advisors blog, Charlie Bilello makes the same point, adding:

after a year like 2020, [stock picking] almost seemed easy.

Had you purchased virtually anything in the high growth/tech/IPO/SPAC space, you would have outperformed the S&P 500 by a wide margin.

Right on, Charlie. I walloped the market in 2020.

But in 2021? Not so much!

Anyway, on Friday some of these 2021 reversals then reversed themselves again. At one point Zoom was up over 13% on the day, Peloton soared, and vaccine maker Moderna ended the session 21% higher on the not-unreasonable assumption that it might be busy retrofitting its vaccine for the new party pooper.

Some of those spikes were short-covering, I think. But it was also a reality check for investors that the pandemic was far from over.

Eight miles high

I’ve been following markets closely for 20 years. Even so I’m still amazed at how apparently unshakeable narratives crumble over time.

You had to own dotcom stocks in the 1990s. You were an idiot for believing in the Internet by 2003. UK private investors only cared about small cap oil and gas shares by the mid-naughties. Nobody should own equities in 2008 and 2009 – investing was all a con. The market was pumped-up and inflated by 2015. Retail share trading was finished by 2019 and we were all going to index – and then along came RobinHood and meme stocks. Government bonds could only crash said many Monevator commentators six weeks ago. They’ve since spiked higher. And so on.

Much of this stuff is only apparent if you’re naughty active investor. At the index level you tend to see broader, steadier moves.

That’s certainly not a reason to abandon index tracker funds – indeed for 99% of people it’s another great reason to own them. (If you want to keep enjoying sausages, never visit a sausage factory.)

Nonetheless, passive investors will someday face their own narrative shift. The market will crash and it won’t bounce back for a good while. “Buy and hold is dead!” we’ll hear. We’ve been through that cycle at least twice in the lifetime of this website alone.

And then that in turn will pass. In investing, never say never again.

Have a great weekend everyone!

*Horace, via the dean of value investing Ben Graham.

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