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The No. 1 Lesson From 2021

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This week offers a sure sign that the year is coming to an end.

No, I’m not talking about Christmas … which is only three days away, according to my youngest son’s daily update.

It’s the arrival of investment outlook guides. Whether it’s email or snail mail, I’m receiving several every day this week, each divining what 2022 has in store.

I thoroughly enjoy these pieces, especially hearing how other predictions may conflict with my own forecasts for the year ahead.

But something is missing.

Before jumping into predictions, I wish there was more reflection on the year we’re about to complete.

After all, you can learn a great deal reflecting on these experiences … whether it’s about yourself or your investment process.

And as I look back on 2021, I keep arriving at one simple theme.

It’s an Illusion

In case 2020 didn’t hammer this point home, 2021 put the illusion of control on full display.

I recently listened to a podcast that said workers are more stressed than ever before and one contributing factor was the lack of control over their environment.

The same can be said for investors’ stress levels this year.

We’ve had several signs that the stock market is careening out of control.

For example, in the chart below, plunging correlations that show stock prices are moving all over the place, instead of rising and falling in tandem:

(Click here to view larger image.)

Also, 38% of the members of the S&P 500 Index are seeing a bear market this year, while the index itself has only dipped by 5% at its maximum drawdown.

Much of that can be linked to the ongoing pandemic, whether through direct channels like stay-at-home versus reopening stocks or through the external factors. COVID’s unpredictable evolution permeates every corner of the stock market.

Challenges like supply chain disruptions, economic growth, inflation and interest rates are all variables that drive stock prices.

Staying one step ahead is tough, but coming to terms with the illusion of control can help you navigate this market in several ways.

My Takeaways

Every investor is unique, especially as it pertains to your risk tolerance and the lens through which you view the world. But we are all susceptible to the same behavioral biases and learning from those can help us improve.

That’s why I want to share my own takeaways and how to manage your portfolio when it feels like there is little control over your external environment.

Accept that control is an illusion. It doesn’t make sense to stress over variables that are beyond your control, which can lead to poor decisions.
Be flexible in your approach. It’s perfectly okay to change your mind when the facts and situation changes.
It’s OK to do nothing. When it comes to investing, cash is also a position. If the stars don’t align, step aside until a clearer picture emerges.

So that sums up one of my key lessons looking back on 2021, and I hope it serves me well into the new year.

Now that I’ve gotten my reflections out of the way, be sure to check back next week for my key predictions for 2022. Never before has seeing the big picture been more important to securing big profits!

Here’s wishing you a very merry Christmas and happy holidays!

Best regards,

Clint Lee
Research Analyst, The Bauman Letter

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