7 Critical Investor Lessons After the Worst 6 Months in Stocks in Over 50 Years

By Chika


Last Updated: July 12, 2022


Markets got off to a bad start in early 2022, and the situation has gotten worse for investors as virtually every sector has capitulated due to the Fed's hawkish tone.

This has heralded the stock market's worst half-year performance since 1970. Rising inflation and interest rate hikes have created ripples in the stock market which has sent valuations of stocks lower.

The S&P 500 is down by about 21%, while the Nasdaq has plummeted by 30%. This performance indicates that the US stock market is already in bear market territory

For investors, the sell-off in the market can be a bitter pill to swallow. However, in retrospect there are some silver linings which investors can use to improve their knowledge and investment strategies. Let's have a look at some of them. 



7 Investor Lessons Everyone Can Learn From a Bad 6 Month Start to the Year

1. Don't plunge into 'trendy' investments.

In the last two years, there were a lot of trendy investments which caught investors' attention.

Buoyed by easy monetary policy, many investments which ordinarily would be passed over were snapped up by investors dreaming of big profit. Financial experts and influencers on social media popularized these stocks.

Alas, in the wake of rising inflation and interest rates, many of them have gone up in smoke just about two years later. 

Retail favorites like SPACs and  meme stocks have been battered in the market sell-off. Many unprofitable companies in sectors like such as EV, cannabis, and disruptive technologies which were the rave of the moment due to their future 'potential',  also went down the drain, as investors flushed them out of their portfolios.

Companies that also had blockbuster public listings have also not been spared from the rout in the market. Companies such as Robinhood, Coinbase, and Rivian,  have all seen their market value slashed by more than half. 

This goes to show that not every trendy stock or investment is a good choice. Understand that people may popularize stocks because of their interests. This is why you should always conduct your due diligence to ascertain the fair value of the stock to know if it is a worthy investment. 


2. Understand the market moves in cycles.

The stock market is currently in a bear market. This is a sharp contrast to the astronomic rally of the last two years. Rising inflation and the hike in interest rates from the Federal Reserve was a signal for investors to head for the exit door.

However, many people missed this signal when the Fed retired its transitory message in November 2021, setting the stage for a tumultuous 2022.

Understanding market cycles allows you to position your investments appropriately and avoid rude shocks.

  • When the economy is doing well, the stock market usually enters a bullish mode.
  • On the flip side, when the economy slows down, the stock market most likely goes into bearish mode.

Seasoned investors understand this, and use this knowledge to know when to enter and exit the market.


3. Don't trust the professionals.

Many people were misled by financial experts and bought stocks based on their recommendations.

However many of these experts have walked back their talk and changed their viewpoint. But unsuspecting investors have been left with nothing but huge losses. 

Many proselytized that bitcoin would hit $100k by the end of 2021, and the S&P 500 set another record high this year. None of them knew inflation would hit 8.6% or that a war would break out in Ukraine, sending energy prices higher. 

This goes to show that everyone has an opinion, but nobody knows what would happen in the market. While this may be a humbling experience, it is also a painful lesson for retail investors to not trust these so-called professionals. 


4. Fundamentals matter.

The stocks which have been battered by most are those with weak fundamentals or those whose macroeconomic outlook is not encouraging.

Sectors such as these have been battered:

  • consumer discretionary
  • e-commerce
  • technology
  • cryptocurrencies

On the flip side, energy stocks have been the best-performing stocks so far this year. This underscores the importance of fundamental analysis as a strategy for picking the right stocks. 

Most times when people think of fundamental analysis, they think it only deals with evaluating a company's financial standing using metrics like PE ratio, dividend yield, ROA, etc.

However, fundamental analysis also entails looking at the macroeconomy to understand the business cycle, and which point in the cycle the company is currently in.

Using fundamental analysis it is easy to see why energy stocks are the best-performing stocks of the year (high oil prices), while consumer discretionary stocks are the worst performers (high inflation). 


5. Another generational buying opportunity.

The rout in the stock market has slashed the valuations of stocks extremely.

About $9trn has been wiped off the stock market. Some stocks have lost about 80% of the market cap.  Even high performers such as Apple, Google, and Meta have also been trashed in this market. But this presents a buying opportunity for investors with a long-term view. 

The capitulation in March 2020 is still fresh in our minds. Many people believed that the world would end and the stock market would recover. But the market did not only recover in subsequent months to erase the losses but also set record highs.

Those who bought during the lows of March 2020 saw their gains increase exponentially. 

The current sell-off in the market seems like deja vu.

Many valued stocks are selling at extremely cheap prices. While the financial media is awash with pessimism and gloom, it may be time for you to start loading up on stocks that would be profitable in your portfolio in the long term.

As they say: "buy when there is blood on the streets, even if it's your blood". Choose wisely. 


6. Every dog has his day.

The 6-month rout in the stock market has shown investors that every dog has his bad day, even the best-performing companies. There are two sides to this narrative. 

Energy stocks were abandoned by the investing public for about a decade.

The 2010s was a lost decade for shares of U.S. energy companies overall. Investors retreated from investing in the sector due to underperformance due marked by commodity price volatility, low return on invested capital, and long-term supply-demand imbalances.

This was further exacerbated by the push for cleaner energy which sent the stock plummeting in 2020. Fast forward to 2022, and this sector has been the only silver lining in the market so far.

On the flip side, the best performers like the FANNG names are getting pummeled. So far this year, Netflix and Meta have posted their biggest daily declines since they went public, with both stocks falling more than 25% in a single day of trading. Netflix ranks among the worst-performing stocks in the S&P 500 this year

Apple, Google, and Amazon have each lost a quarter of their market values this year. This shows that nothing is guaranteed in the stock market. Investors have to be like sailors, constantly adjusting their sails to the direction of the wind. 

What may be a very good stock today based on fundamentals and price action may not matter in the future when the direction of the wind changes. Netflix for example has seen gains made in 5 years wiped out in the last 6 months. You have to know when to get out and stay out. 


7. You can't fight the Fed.

Don't fight the Fed" is an old investor saying that cautions you to align your investments with the current monetary policies of the Fed rather than against it. It highlights the correlation between the Fed's monetary policies and the performance of the stock market.

One of the key duties of the Fed is to guide the economy through interest rates on borrowing. As the Fed raises or lowers these rates, it becomes more or less expensive for businesses to borrow money. In turn, this action varies the opportunities for investors.

When the Fed sets low rates, it does so to help the economy expand. Consumers and corporations can then borrow money more cheaply and decrease the cost of debt, which translates into higher consumer spending and corporate profits. 

Tightening monetary policy such as higher interest rates limits the amount of borrowing that can be done because the cost of debt is higher. This slows corporate growth and profits because companies can borrow to fund operations. 

Corporate stocks tend to do well when their balance sheets reflect higher cash flow, reinvestment, and equity. When rates are low, their stocks can be good investments.

However, when rates are high or rising, stocks can be less attractive. As such, an investor has to always keep a keen eye on what the Fed is saying and doing because this would have a significant impact on how stocks will do in the short to mid-term. 



There are Investor Lessons Here, if We Take Them

After the boisterous run of the last two years, the stock market  has done a 180 on investors, and plummeted.

Rising inflation, coupled with the most aggressive rate hike in over 40 years has sparked a sell-off in all, but one sector(energy) in the stock market. While it may be depressing time for stock investors, it is always advisable to keep the ling term in view.

This is the time to get high quality stocks for cheap, but you have to get your timing right lest you would be catching a falling knife.  

Photo by Karolina Grabowska


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