2021 in review; lessons for investors

29 December 2021

2021 in review; lessons for investors

2021 has been another amazing year in the markets as of 21 December, global share markets are up 18% and amazingly, volatility remains at relatively low levels. This is a very different outcome from what we expected at the start of the year, but there are some great lessons to take forward into your investing journey.

Expect the unexpected

At the start of 2021, no one expected that markets would rise a further 20% in 2021, this following a 15% rise in 2020 providing investors with a 30% return over the past 2 years despite living through a pandemic. Economists, investors, and market strategists have been continually surprised by economic improvements and very strong corporate earnings.

Hedge funds (supposedly the smarted people in the industry) have been caught off guard and have been short the market setting themselves up for the market crash. That bet has clearly not worked with this market performance.

Looking outside of the numbers and where we are now the drivers of the markets are extremely different to what was forecast at the start of the year or even the middle of the year:

  • Ongoing crackdown in China targeting the tech, education, and financial sectors
  • With the emergence of inflation for the first time in over 30 years, Central banks around the world have been trying to encourage inflation for over 30 years and now it has come roaring through at levels not seen since the 1970s
  • The emergence of yet another Covid variant (Omicron) just when we thought we were on a clear path to the end of the pandemic

The kōura funds are impacted by currency (translation of local currency indices to NZD) and also differences in constituents between the underlying indices and the actual investments that the kōura funds invest in.

Social Media has changed the way markets operate

Only a few years ago, there was a strong belief that institutional investors were the only ones that matter. Institutional investors could push companies and drive market outcomes. The Reddit group ‘WallStreetBets’ destroyed that theory in January when a series of retail investors decided to buy some of the most shorted stocks on the American Stock exchange to force losses onto large, sophisticated hedge funds.

Hedge funds will “short” a share when they believe the share price will fall. They do this by borrowing a share and selling it today with the hope of purchasing a share at a later date for a lower price. They win if they manage to sell the share today at a high price and repurchase the share in the future at a lower price.

But the Combination of social media and low-cost trading platforms (like Sharesies and RobinHood) has shown that retail investors can move in large packs and sway markets. The infamous ‘WallStreetBets’ forum on Reddit has over 11.4m members so a call to action can go a very long way, particularly when people can invest small amounts with no apparent transaction costs.

When they started targeting GameStop and AMC (two of the most shorted companies listed in the U.S), their share prices rose 5- or 6-times leaving hedge funds nursing hundreds of millions of dollars in losses.

Trying to time the markets is truly impossible

The equity market has gone through a number of periods of very high volatility in 2021, every time that we think we are staring down the abyss and things are about to crash the rally continues. Whether it be Omicron, rising interest rates, slowing economic growth or high inflation nothing has managed to throw the market off its ongoing trajectory. Any investor that has (potentially logically) reduced their market exposure expecting a downturn has been badly burned.

This is one of the main reasons why the average hedge fund has outperformed the S&P500 by about 10% this year.

FOMO investing rarely ends well

FOMO investing is when you invest because everyone else is doing it, where an investment decision is based on the fear of missing out on returns rather than a well thought through investment strategy. Some common FOMO investments include GameStop, AMC, Bitcoin or even Air New Zealand was a kiwi investor favourite for a while.

A basket of the top 25 Meme stocks (those that the Reddit crowd talked about the most) is down 22% since mid-January. This adds credence to the theory that if it’s too good to be true and you don’t understand the sudden rise, then it probably is.

Good management can create great companies

There are some great examples of phenomenal turnaround stories in 2021 that really drive home the rule that great management teams make great companies, and great investment teams.

Elon Musk is divisive and goes about things in an at times a bizarre way. But there is no hiding the fact that he has managed to drive his people and teams to completely transform the auto and space industries. With him and his drive at the top, it’s hard to see his companies failing.

Hertz is another company that has managed to emerge from bankruptcy earlier in the year with a new management team and a new strategy. Investors that saw through the depths of the bankruptcy are looking at a 1000% return on their investment.

Crypto finally moved mainstream

We have seen crypto move into the mainstream with banks and asset managers now starting to help their clients invest in the asset class. We’ve now started to see large hedge funds invest in crypto with it becoming an accepted asset allocation to apply crypto in a portfolio (2-3%).

Diversification is critical to any investment strategy

2021 has been a year where different markets and different sectors have moved very differently. The NZ market is likely to post its first negative return year for over 10 years, Hong Kong has fallen by 15% and the Chinese market is only slightly negative. All of this while the US market is up 28%. This divergence in performance demonstrates why it is important to have your eggs in lots of baskets because you never know what market will fire next!

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