The S&P 500 ended 2022 just shy of a 20% loss for the year. A 20% decline is how many investors define a bear market, so while 2022 might not technically make the cut, market watchers are feeling the pinch.
The good news is that a bad year is often followed by a good one ... but not always. So what should investors expect for 2023? For many nuggets of investing wisdom, it's worthwhile to pay attention to what the Oracle of Omaha, Warren Buffett, says on the topic. Here's some advice to think about as you gear up for investing decisions in 2023.
The market doesn't always reflect the state of the economy
Prior to 2022, the most recent year the market ended with a loss was in 2018 when the S&P 500 fell 4.4% (including dividends). Within that "light" loss, however, the market was mixed, and many stocks ended the year hitting new highs. Amazon stock, for example, gained 28% in 2018.
The worst loss over the past 50 years was in the 2008 crash, when the S&P 500 plunged 37%. That was the year the mortgage crisis led to the collapse of several major financial institutions and a spiral that affected the entire economy.
At the end of that year, Buffett's prediction in his 2008 letter to Berkshire Hathaway shareholders was that the headwinds would continue into 2009, but he couldn't predict how the market would react. "We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond," he said. "But that conclusion does not tell us whether the stock market will rise or fall."
As investors enter a new year and the economy and markets remain volatile, it's important to heed those warnings, as well as recognize the note of optimism.
There's a bull market about 75% of the time
Although there's no way to know whether or not a bull market is coming right now, investors can look to the market's past performance to give them some sense of what to expect in general.
In his 2008 letter, Buffett noted that in the 44 years since the beginning of his tenure at Berkshire Hathaway, there was a market gain in 75% of those years. "I would guess that a roughly similar percentage of years will be positive in the next 44," he said.
In the 14 years since then, there have been only two years, including 2022, when the S&P 500 lost value, which amounts to an 86% success rate.
Does that mean investors are in for some more bad years? Probably. But that shouldn't be alarming, for two reasons.
One, investors don't know when the next down year will happen, no matter what the experts say. Buffett admitted in that same letter, "Neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance."
But even if the market is "due" for some further losses according to the historical ratio of up years to down years from Buffett's experience, it also seems unlikely to happen in 2023. In the past, two consecutive down years have been a rarity that has only happened twice since 1965, including one occurrence of three down years in a row.A down year is followed by a gain an overwhelming amount of the time.
Second, and more important, if you've built up a diversified portfolio of great stocks and add to it consistently, the volatility of any given year (or few years) shouldn't matter too much.
Your investment thesis shouldn't change based on what type of market you're in -- but your investing decisions might
Getting into the market means knowing from the outset that bad years will happen. Going back to his 2008 letter one last time, Buffett said he focuses on four elements in the companies he invests in, "in good years and bad":
1. Developing a strong, "Gibraltar-like" cash position.
2. Building out moats.
3. Expanding earnings streams.
4. Nurturing management.
These principles are essential to the companies owned by Berkshire Hathaway, but investors can use this framework to find great stocks too.
When there are bad years, you can follow Buffett's other notable piece of advice from 1986: "be greedy when others are fearful." That was on full display in 2022 as Buffett scooped up several new stocks and enlarged some of his existing positions.
Does Buffett think a bull market is coming? Yes. In 2023, specifically? Who knows? Regardless, investors should focus on on what they can control, and that includes building a portfolio of quality stocks and holding them long term for the greatest chance of success in the market.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com and Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
As an experienced financial analyst and investment enthusiast, my in-depth knowledge of the subject allows me to analyze the key concepts presented in the article with a high level of expertise.
The article begins by highlighting the performance of the S&P 500 in 2022, noting a just shy of 20% loss for the year. The 20% decline is often considered a threshold for a bear market. Drawing on my expertise, I can affirm that this aligns with the common definition used by many investors to characterize a bear market. However, the article rightly points out that a bad year is not always followed by a good one, emphasizing the importance of understanding market dynamics.
One significant concept discussed is the idea that the market doesn't always reflect the state of the economy. The article refers to the year 2018 when the market ended with a 4.4% loss, but within that, individual stocks like Amazon performed well, gaining 28%. This underscores the importance of considering individual stock performance within the broader market context, a crucial insight for investors.
The reference to the 2008 financial crisis, where the S&P 500 plunged 37%, is another key historical event. It highlights the unpredictability of market reactions, even in the face of a clear economic downturn. Warren Buffett's cautionary statements from his 2008 letter to Berkshire Hathaway shareholders emphasize the challenge of predicting market movements based solely on economic conditions.
The article also introduces the notion that there's a bull market about 75% of the time, drawing from Buffett's historical observations. This long-term perspective is valuable for investors, suggesting that positive market trends tend to prevail over time. However, it's crucial to note that past performance does not guarantee future results, as acknowledged by Buffett himself.
Furthermore, the article touches upon the importance of diversification and consistent investment. Buffett's advice on building a diversified portfolio of great stocks and adding to it consistently provides a solid foundation for long-term investors. The idea that a down year is often followed by a gain is reassuring for those with a patient and strategic approach to investing.
Finally, the article emphasizes the significance of maintaining a consistent investment thesis regardless of market conditions. It highlights Buffett's four elements for investing in companies: strong cash position, building moats, expanding earnings streams, and nurturing management. These principles serve as a timeless guide for investors, emphasizing the importance of focusing on the fundamentals of individual companies.
In conclusion, as an expert in financial analysis and investment strategies, I can confidently affirm the validity and importance of the concepts presented in the article. These include the unpredictability of market movements, the historical prevalence of bull markets, the value of diversification, and the enduring principles of sound investing articulated by Warren Buffett.
