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The Sun Also Rises

Optimize Team February 02, 2023

Investing is never a smooth road, and 2022 was a difficult reminder that the markets can go down just as they go up. Financial markets were largely challenged by the aggressive actions of central banks in raising rates in their attempt to combat high inflation; a stark contrast to the excessive exuberance of 2021. Indeed, the market pendulum can swing from one extreme to the other, with prices often overshooting underlying “fair values” in both directions during the course of a cycle. As renowned investor Benjamin Graham once said, “In the short run, the market is a voting machine. But in the long run, it is a weighing machine.”


While it is never easy to see asset prices under pressure, it has led to a more healthy outlook for how risk assets are viewed and, perhaps, more thoughtful consideration of how capital is deployed. For the equity markets, we have seen a return to more reasonable multiples and fair values, better-reflecting fundamentals like corporate earnings and economic growth that drive prices over longer time periods.


It is instructive that throughout the turbulence of 2022, renowned investor Warren Buffett added to his portfolio — reportedly his largest net purchases in 30 years.1 Buffett’s investment thesis has always been to buy quality companies at reasonable prices, with the intention of holding them for the longer term. He knows that there will be down years and uses them to seek opportunity, strong in his conviction that brighter days lie ahead. Since the start of the millennium, Buffett has actually underperformed the S&P 500 over 40 percent of the time on an annual basis.2 Yet, he has stuck to his approach to outperform the markets over time. It is a reminder that even for the most respected investors, investing is never a smooth road.


Have we seen the bottom of this cycle? As the saying goes, it’s always darkest before dawn. As we enter 2023, many of the same challenges we faced in 2022 persist: geopolitical tensions, lingering inflation, though there are positive signs of slowing, higher interest rates and continuing central bank tightening policies intended to slow economies. While economies need to slow for inflation to moderate, let’s not forget that we may be well-positioned to endure these times. Our financial systems continue to be healthy; many companies and individuals are not heavily indebted, a previous driver of more serious downturns. Labour markets have been strong, though this has complicated central bank efforts to rein in inflation. And, after a volatile year, the prospect of an economic slowdown may be somewhat reflected in equity prices: Markets often discount the direction of the economy well ahead of time. Most important, while short-term setbacks are expected to occur from time to time, corporate profits and economies have continued to grow over longer periods — and this isn’t likely to change.


This points to the importance of continuing to plan for a better tomorrow. As investors, we will inevitably experience dark days and even down years; yet, as Buffett’s actions remind us, we shouldn’t forget that the sun also rises.

  2. BRK-A annual returns vs S&P 500, 1999 to 2021.