After 2022, I ask myself, what’s after disappointment? You might expect to see some graphs with squiggly lines to explain how to recover from investment losses. Instead, let’s try something different and more common. See the picture with the perky green vegetables? That was what my investment portfolio looked like in 2021. I put in lots of hard work, and there was lots of promise. Then January hit, and the markets fell like a stone.
See the picture with the dead plants? Here is a real picture of my garden before and after the big freeze the week before Christmas. That was like my investment portfolio at the end of 2022. The wilted, dead plants result from weeks of cultivating, watering, and nurturing those plants and then an unexpected deep freeze. And now it looked like crap! So, what’s after disappointment?
Regretfully I have the same feeling about my investment portfolio. It looks like crap. And many of my friends and clients are probably asking that proverbial question too, what’s after disappointment? There are a lot of people that have put their hard-earned money into investments that feel the same way. They made plans, researched, and followed experts’ advice, and on the last day of 2022, almost every investment market looked like crap. Are you asking yourself those questions?
You’re entitled to have a moment.
Ok, ok, let’s stop the pity party. I’m sure we could each cry me a river over the disappointments each of us has had. But here is what IS after disappointment…..recovery. And you find recovery by looking for the stepping stones in that river of tears. Yeah, I know it sounds a little corny. But the words are not original. There are about a half dozen versions of the song “Cry Me a River.” That’s because it describes the heartache people feel very well. Personally, I like Michael Bublé’s version best.
Please don’t mind me using garden analogies so much. But you have to admit, the pictures of 2021 and 2022 fit really well. So, what am I going to do about my garden? I am going to do the same thing with my garden that I am doing with my investment portfolio. And if you have investments that have wilted over the past year, this might be a good lesson for you to consider.
How to start recovery
Look at that second picture closely in the photos above of my garden. There are some sprigs of life. Some plants did make it through 2022. So, I start recovering after disappointment by trimming the bad parts and nurturing the good ones. I’ve already planted new seedlings too. I’ll keep you posted on its recovery.
That is the same thing I will do with my investment portfolio. At this point, I have to warn you and give you a geek alert. Some of the following information gets into some geeky stuff related to investing. Bear with me for a moment. There is a simple point to my process.
Here is my process
If you watch any of the stock analysis videos I have done, I use a method I call SEC. It is a process that considers investments’ stability, earnings, and competitiveness. For my stock holdings, I am doing the same thing. I believe good companies have a better chance of making it through bad times. And we are certainly going through bad times now.
The Buffett Rule
I begin identifying a good stock as one that is stable. I follow Warren Buffett’s philosophy of looking at a company’s moat. Here is what Buffett is looking for in companies.
Next, I look at the earnings of the company. Sometimes I use ratios like the price-to-earnings ratio. Then I compare those earnings to other similar companies.
And lastly, that comparison leads me to consider how competitive a company is to its peers. Most importantly, when comparing companies, it is crucial to understand that nobody is the king of the mountain forever. There will be good times and bad times. I am looking for companies that are successful more than they are unsuccessful. With this in mind, some of the analysis is a judgment call. But it is an educated judgment call.
In as much, this is not a perfect or foolproof method of recovering after disappointment. But if you go back to my letter last week, you might remember that one of the keys to succeeding at anything is defining the process you use.
Ok, I know you are probably more concerned about things like your investment holdings in your retirement account. And that is perhaps more mutual fund oriented than individual stocks. So, what do you do in that situation?
I will stop for a second and remind you that I am not giving anyone individual investment advice through this letter. Instead, I am here to help educate you on your options. So, with that in mind, I suggest that people use a process of looking at their mutual fund holdings similar to what I do for stocks.
The Process for Portfolios
I call the process I use to analyze portfolios like mutual funds the DEC process. DEC is a process of looking at portfolios’ diversification, earnings, and competitiveness. My process considers the internal characteristics of a pooled investment like a mutual fund. Plus, remember that past performance is not a guarantee of future results.
With that in mind, here is an example of how to view the diversification of a mutual fund or other pooled investment. First, look at the sectors of the economy in which the investment concentrates. Then ask yourself how those sectors might perform during a recession. For example, how do you think defense stocks will perform during the current recession? Accordingly, here is how you might answer that question. The portfolio will have a favorable or unfavorable result based on what you think the sector’s future outcome will be.
There’s more to come.
The entire process is too long to go into today. But I am working on a short set of video lessons to help guide people through the process. I’ll send you an email as soon as I release that publication.
If you subscribe to my weekly email letter, I’ll let you know when I publish that video lesson. FYI, if you want to get notified, you can do so by asking for my retirement budget worksheet through the previous link. Frankly, that worksheet only has a little to do with today’s point. Still, by requesting that worksheet, you can get on the list to be notified when I publish my video lesson that includes the DEC process.
So, after paring my garden and my investments, what do I expect? In the garden, I am hoping to have a productive crop. In my investments, I want two things. First, I want to limit my losses and have the possibility for better investment performance when the markets recover.
The best laid plans….
What you want may be different. So, you have to judge if a process like the one I have described would work or not work for you. There are no guarantees in this process.
I equate it to one of my favorite quotes by Robert Burns,
the best-laid plans of mice and men often go awry.”Robert Burns
To end, I hope that I have helped you figure out what’s after disappointment. But as always, I must remind you that this information is for educational purposes only. This information is not investment, accounting, or tax advice. For those things, you need to find yourself a good fiduciary advisor. 😉
May the garden in your life and your investment portfolio fare well in 2023 until next time.
Happy New Year,
PS, here are some other great topics from my blog that may interest you.