Performance Report: 12/31/2022
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All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 12/31/2022.
S&P 500 Index2
2022 was a challenging year and I'm glad to put it behind us. On the "cup is half-full" side, our since-inception returns are still well above traditional investment strategies, especially when considering risk-adjusted returns. To measure investment returns relative to risk, I developed a simple calculation that I call VORR, standing for "Value Over Risk Ratio". To calculate VORR, I simply divide total returns since inception by the sum total return of all negative months. VORR essentially tells us "how much loss does an investor have to endure to earn X return." As you can see, the VORR score for my strategy is twice that of the S&P 500 and many multiples higher than our benchmarks.
On the "cup-is-half-empty" side, we still experienced losses this year. In my updates late last year, I went on record that I expected the relentless bull market of the past 12 years to finally come to an end. Given my ability to discern the larger trend, I have failed thus far to properly capitalize on it. Further, we have had several long stretches without meaningful appreciation in your accounts. This means for those of you who contracted with me at inopportune times, your since-inception returns will be less than my long-term clients. We would have been better off just sitting in cash. I find these failures on my part greatly frustrating.
As I stated in past updates, my goal for the past quarter was to update the MAP to make it more consistent. While it is still too early to tell, the returns from this quarter suggest my objective is being met. While stock market volatility has been off the charts, our volatility has been far less. In Q4, the S&P's average monthly net move was 6.8%. Ours was just 1.2%. With that said, our gains in Q4 were a mere 1.5%, or just over 6% annualized, which I consider insufficient. The MAP has historically provided gains in fits so we'll see how the next few quarters play out.
One issue that worries me moving forward is overnight volatility. There was a time when few if any stocks made significant moves overnight on a consistent basis. Unless a stock came out with a big earnings surprise or another unexpected news item, rarely would stocks see big moves during "non-trading hours". (Non-trading hours are defined as those times of day when the NYSE is not open - electronic trading can still take place but most of the trading volume takes place during the time the NYSE is open which is 8:30 am - 3:00 pm CST.)
In recent months, this has changed dramatically. Many stocks see significant moves overnight as geopolitical risk has increased coupled with the sizeable uptick in market volatility. While overnight trading has become more apparent, there is still limited liquidity. IB does allow us to trade during "non-trading hours" but doing so can be problematic. I say all this because if a stock moves beyond my stop price overnight, we will likely experience losses greater than my target. It's been more of an issue with commodity-based equities which make up an outsized portion of our portfolio. Given the MAP typically averages into an investment theme, it's not as big of an issue as if I were simply using index funds to build all our exposure but it is causing some issues. I will continue to monitor how overnight moves impact us and will look to make adjustments if I deem it necessary.
In my update posted last September, I wrote about how each decade seems to have its owns dominate theme. In my update, which you can read by clicking here, I wrote:
So it is, that each decade seems to be “an appointed time” for the capital markets to behave in their own peculiar way. No two decades look alike. They are all unique in their very own respect.
If this decade follows suit, it appears that the next seven years will continue to be wild. Nauseatingly wild! Stock markets have already experienced two declines in excess of 25% in just the first three years of the decade. 2022 was the first year in capital market history where stocks and bonds both declined over 10%. Inflation figures registered their highest marks in a generation. Market prognosticators have widely adopted the adjective "UNPRECEDENTED" to explain markets in 2022.
But as I look back, it seems to me that every market cycle is unprecedented. Never before had a stock market index appreciated 100% in less than two years as happened in 2020-'21. Never before had stock indexes gone an entire decade without a 10% correction as they did from 2010 - 2020. During the 2000's, the stock market experienced two 50% declines, something not seen since the 1930's. I could go on and on but I think I've made my point. Capital markets always find a way to surprise and shock us. Those basing their forward strategy on yesteryear's prevailing trends are doomed to fail.
To be continued...(again)
As we start a new year, stock market "experts" will roll out their "calls for 2023". They will all look a little different but almost all of them will be the same. And pretty much all of them will be wrong. Starting in August of 2021, I wrote why I thought US stock markets would reverse their upward trend and enter a bear market. That call proved incredibly precise, a little early but precise. And at the time, it was incredibly contrarian. I was all alone in my prediction but I based it on copious amounts of research and observation.
Now, that call makes me look really smart, but, at the time, I was terribly hesitant to make it. I couldn't ignore the bearish screams from the market that kept getting louder and louder. But at the same time, stock bulls had been so resilient and bond yields remained so stubbornly low, I wasn't sure what could change their course. It seemed like the perfect bull market trap but it was difficult to "step out on that limb" when everyone was so optimistic.
Today, I'm seeing another development that I believe will shape the markets even more so than the "unprecedented" moves of 2022. I mentioned this in last month's update and I promised to give you more information but I'm still organizing my thoughts. I want to communicate my investment thesis in a way that is clear and easy to understand. My thesis for 2023 is even more contrarian than it was for 2022, yet, it seems even more obvious. I have connected all the dots in my head but transcribing them onto paper is proving to be challenging. Once I have it written, I'll send it over to you.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to S&P 500, 40% allocation to BND and a 20% allocation to IEFA.