What A Difference A Year Makes!

What A Difference A Year Makes!

If I had told you a year ago that Facebook’s stock price would drop by more than 70% in 2022, what would you have thought? That I’m crazy? Well, that’s exactly what occurred. From 2014 through 2021 an investment in Facebook (now Meta) would have cumulatively outperformed an investment in the S&P 500 by nearly 600%. Yet just one year later the situation has reversed. The cumulative return on Meta from 2014 through 2022 is now 40% below that of the large cap index. What happened?

It’s called investing. And when it comes to predictions and expectations, it’s so much easier for people (and especially the media) to extrapolate performance in straight lines versus around corners. Most investors cannot see a market turn coming, let alone react to it. The ones who do, for the most part, are those who have been predicting it over and over long enough that they eventually get it right (although they usually miss out on a lot of the growth occurring before the downturn).

As I’ve written before, consistently predicting stock price turns is impossible for two reasons. First it requires the ability to accurately guess future company earnings with all its myriad contributing factors. That’s something even CEOs have a hard time doing. Second, you need to be able to ascertain how much (and in what direction) investor sentiment is changing over time. That’s like trying to predict the path and speed of a school of fish as they zig and zag trying to avoid predators.

Is it necessary to be able to pick stocks in order to be a competent investor? Not at all. Competent investing means diversifying your savings in a manner that minimizes the risk associated with the return that you need in order to support the lifestyle that you want. Pursuing higher returns than the market provides necessarily involves taking on more risk. Sometimes that risk pays off, as it did with Meta over the previous eight years. Sometimes it doesn’t, as in 2022. And in general, for every increment in return you seek, investment risk increases at a much faster rate. At some point you cross over into the realm of pure gambling (think cryptocurrencies).

I’m not suggesting that Meta is a stock to avoid. Or to purchase. I really have no idea. But if you focus on diversification rather than trying to pick winners, over the long run you should do quite well. I wish for a happy and more lucrative 2023 for all investors. But since I don’t know what will actually happen, I’m keeping my investments well-diversified.

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