3 Timeless Investment Lessons from the NASDAQ Bear Market of 2022

ID pads (FB -2.56%) The stock is up more than 17% Thursday, then Amazon (AMZN -14.05%) The stock is down more than 12% in the post-closing trading period. When such large companies make huge moves up and down, it can be a sign that the market is volatile. And due to Nasdaq Composite Having plunged into a bear market in a matter of months, it is clear that the stock market 2022 looks a lot different than the rupture year we had in 2021. A bear market is defined as a decline of at least 20% from its all-time highs, while a correction Standard & Poor’s 500 Currently there, it represents at least a 10% decline from its all-time high.

However, bear markets are not inherently bad things. And with the right temperament and patience, it can lead to a life-changing fortune. Here are three timeless investment lessons from the 2022 Nasdaq bear market that you can take with you to become a better investor.

Image source: Getty Images.

1. It is stair up and elevator down

There is an old saying that the stock market is a staircase up and an elevator down. We see this pattern playing out before our very eyes.

Bull markets are usually slow and steady and last for several years, while bear signs are sharp and fast and tend to last for one year or a few years. At least that’s what history tells us. This is certainly what has happened since the financial crisis. There has been a fairly bull market for 12 unbroken years since the financial crisis. But included in this bull market are quite a few bear markets – like the fall 2018 bear market, the spring 2020 bear market, and the bear market that we’re in right now.

However, through it all, the S&P 500 is still producing a 375% return (not counting dividends) since January 1, 2009, while the Nasdaq has generated more than 700% (excluding dividends).

^ SPX Chart

^ SPX data by YCharts

The average annual profit for the S&P 500 between 1950 and 2021 was 12.36%. But the standard deviation for that period was 16.04 percentage points. This means that approximately one year out of every three years produces a worse annual return of -5.91% or more than 26.17%.

It is also worth noting that there have been 18 plus years and 53 years since 1950. But the average return during a down year is -11.4%. However, this data is somewhat misleading since bear markets are not likely to correlate with calendar years. For example, in 2018, the S&P 500 was close to 10% YTD (YTD) in early October 2018, and dropped to 12% YTD by Christmas Eve (swing 22 percentage points lower of three months), but ended the year after that down just 6%.

2. Reviews are important

Valuation is probably one of the most controversial debates in the investment field. On one end of the spectrum, you have investors like Warren Buffett who preach value investing and only pay reasonable amounts to companies based on their earnings, free cash flow, etc. Then on the other extreme, you have investors like Cathy Wood who argue that innovative companies that change their industry models have so many positive aspects that valuation should be an afterthought.

The 2022 bear market has taught us that while companies may have a lot of potential, there is a great deal of uncertainty about whether they can live up to lofty expectations. Uncertainty can come in the form of unreliable management, as seen by the astonishing collapse of Tilladock Health (TDOC 0.75%) The stock, which is down more than 90% from its all-time high. It can also come in the form of increased competition, which is what we’ve seen in the fintech space as legacy financial services firms open their pockets to investments, straining the advantage firms like. RobinhoodAnd SoFiAnd cocky It was thought to be in spades.

The best approach for most investors is to find a compromise between value and growth using as many known variables as possible and avoiding unknown variables. In this context, that probably means sticking mostly to existing companies with positive free cash flow and growth potential. These are the kinds of companies you’d want in your corner if the market collapsed.

3. Invest in companies you understand and commensurate with your own risk tolerance

The biggest mistake an investor can make is not selling too soon or buying something too high. It is an investment in companies that you do not understand and that do not match your tolerance for personal risk. Because if you did, you wouldn’t know why the stock could go up 400% in one year and then go down 90% the next. Or why a huge earnings stock can barely move while the market is rising and then just barely go down when the market crashes.

Aligning your personal risk preferences with companies you understand and believe in is the best way to avoid the psychological torment that can occur when a bear market stresses both good and bad companies and you don’t know how to react. By sticking to a process, you stand the best chance of withstanding the vagaries of the market and letting the power of compound interest work to your advantage in the long run.

Embrace lifelong learning

Many investors who are new to the stock market have never endured a bear market for several years. The bear market in late 2018 only lasted for months. Same with the 2020 bear market. In fact, there hasn’t been a bear market that has lasted for more than a year since 2008. By taking a long-term perspective while also using the bear market as a learning experience, you can use this period of stock market volatility to sharpen your skills and become A better investor. If done correctly, this approach can yield lifetime profits that far exceed any pain your portfolio is currently experiencing.

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