3 Timeless Investing Lessons from the 2022 Nasdaq Bear Market

Metaplatforms (NASDAQ:FB) the stock rose more than 17% on Thursday, then Amazon (NASDAQ: AMZN) the stock was down more than 12% in after-hours trading. When these big companies make mega moves up and down, it can be a sign that the market is volatile. And given the Nasdaq Compound plunged into a bear market within months, it is clear that the stock market 2022 is very different from the roaring year we had in 2021. A bear market is defined as a pullback of at least 20% from a historic high, while a correction, that the S&P500 currently stands, is a pullback of at least 10% from a record high.

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

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1. It’s a staircase that goes up and an elevator that goes down

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

Bull markets are usually slow and steady and last for several years, while bear markets are sharp and fast and tend to last only one or a few years. At least that’s what history tells us. And that is certainly what has happened since the financial crisis. There has been a more or less unbroken 12-year bull market since the financial crisis. But this bull market included a handful of bear markets, such as the fall 2018 bear market, the spring 2020 bear market, and the bear market we currently find ourselves in.

Yet through it all, the S&P 500 has consistently produced a 375% return (excluding dividends) since January 1, 2009, while the Nasdaq Composite has produced a return of over 700% (excluding dividends).

^ SPX Chart

^ SPX data by YCharts

The median annual gain of the S&P 500 between 1950 and 2021 was 12.36%. But the standard deviation for this period was 16.04 percentage points. This means that approximately one in three years produces an annual return below -5.91% or above 26.17%.

It is also worth mentioning that there have been 18 down years and 53 up years since 1950. But the average return in a down year is -11.4%. However, this data is somewhat misleading given that bear markets are unlikely to correlate with calendar years. For example, in 2018 the S&P 500 was up nearly 10% year-to-date (YTD) in early October 2018, fell -12% year-to-date on Christmas Eve ( a change of 22 percentage points in less than three months). ), but then ended the year down just 6%.

2. Valuations matter

Probably one of the most contentious debates in investing concerns valuation. At one end of the spectrum, you have investors like Warren Buffett who preach value investing and only pay companies reasonable amounts based on their revenue, free cash flow, etc. Then, at the other end, you have investors like Cathie Wood who argue that innovative companies that change the paradigms of their industries have so many upsides that valuation should be an afterthought.

The 2022 bear market has taught us that while companies can have tons of potential, there is great uncertainty about whether they can meet great expectations. Uncertainty can take the form of unreliable management, as we have seen with the dramatic collapse of Teladoc Health (NYSE: TDOC) stock, which is down more than 90% from its all-time high. It may also come in the form of increased competition, which we have seen in the fintech space as traditional financial services companies open their portfolios to investments, which has strained the edge of companies like Robin Hood, SoFiand Reached we thought we had it in spades.

The best approach for most investors is to strike a balance between value and growth by using as many known variables as possible and avoiding unknowns. In that vein, that probably means sticking mostly to established companies with positive free cash flow and growth potential. These are the types of businesses you will want in your corner if the market crashes.

3. Invest in businesses you understand and that match your personal risk tolerance

The biggest mistake an investor can make is not selling too soon or buying something too expensive. It’s investing in businesses that you don’t understand and that don’t fit your personal risk tolerance. Because if you do that, you won’t know why a stock can go up 400% in one year and drop 90% the next. Or why a dividend-heavy stock can barely move as the market soars, then barely fall 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 puts a strain on good and bad companies and you don’t don’t know how to react. By sticking to a process, you have the best chance of weathering market volatility and letting the power of compound interest work in your favor in the long run.

Embrace lifelong learning

Many investors who are new to the stock market have never endured a multi-year bear market. The late 2018 bear market only lasted a few months. Same with the bear market of 2020. In fact, there hasn’t been a bear market that has lasted more than a year since 2008. learning, you can use this period of market volatility to sharpen your skills and become a better investor. If done correctly, this approach could pay lifetime dividends that far outweigh any pain your portfolio is currently experiencing.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Daniel Foelber has the following options: $100 January 2024 Long Calls Teladoc Health, $150 January 2024 Long Calls Teladoc Health, $110 January 2024 Short Calls Teladoc Health, $170 January Short Calls 2024 to Teladoc Health and July 2022 $7.50 short calls to SoFi Technologies, Inc. The Motley Fool holds and recommends Amazon, Meta Platforms, Inc., Teladoc Health, and Upstart Holdings, Inc. The Motley Fool has a policy of disclosure.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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