Last year was a challenging year for investors as recession fears, rising interest rates, inflation, geopolitical risks and other factors took their toll on markets. Amid such uncertainty, investors should focus on proven investment principles and not be carried away by fads that can lead to mania and bubbles.
It’s hard not to get caught up, but it’s important to have realistic expectations at different stages in the cycle. For example, over the past few years the hype around crypto lured investors in at peak moments. But there’s a lot of potential to make big mistakes by being too unquestioning;Over the past few years a bubble emerged in profitless technology companies. This clearly started to deflate in 2022 just like the dot-com bubble of the 1990s did in 2000.
I suspect that in recent years a dangerous misconception crept in for many that fundamentals don’t matter and perhaps even that all companies that are growing fast are therefore valuable. As a result, in recent years investors to a degree gave all companies a pass on their reported financials when, at the end of the day, you have to be profitable; and you have to generate cash flows.
Even if you could do this — and countless studies have shown humans cannot forecast recessions with any degree of useful precision — you would then have to decide when to get back into the market, and that requires forecasting when the market is going to stop worrying about the recession — good luck with that.
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