On “N95,” Kendrick Lamar succinctly captured some of 2022’s major themes:
The world in a panic, the women is stranded, the men on a run
The prophets abandoned, the law take advantage, the market is crashin'
For the sake of brevity, this post will focus on the last item.
Taking Stock
What do the following charts have in common?
Pull up a 1-year chart for most risk assets, and you’ll see they show a similar trend. Many risk assets, especially high beta and growth-oriented securities, peaked in late 2021 or first half 2022 and came crashing down over the following months.
In fact, all of the above charts peaked around March/April 2022. The Federal Reserve began raising interest rates on March 17, 2022 to combat inflation. The fact that the timing aligns is no coincidence.
At this point, the short-term effects of higher interest rates are well-documented. The results of the Fed tightening monetary policy have been unpleasant, but in many regards, market and economic activity throughout 2022 was logical.
Investment decisions at the corporate and individual level generally became more measured. Unsustainable froth in some of the most speculative assets was washed away, and equity prices overall probably better reflect the new interest rate reality.
The Fed’s policy change effectively ended the easy money era, which began after the Great Financial Crisis. I’d be lying if I told you I won’t miss the heavily subsidized Uber rides, food delivery, and dry cleaning services from VC-backed startups that pretended to be tech companies. Derek Thompson from The Atlantic said it well:
It was as if Silicon Valley had made a secret pact to subsidize the lifestyles of urban Millennials. As I pointed out three years ago, if you woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered on DoorDash for lunch, took a Lyft home, and ordered dinner through Postmates only to realize your partner had already started on a Blue Apron meal, your household had, in one day, interacted with eight unprofitable companies that collectively lost about $15 billion in one year.
My Approach
Having lived through the 2017 crypto and ICO bubble, I was fortunate enough to see the writing on the wall this time around. Random celebs and influencers peddling assets they had no business being involved with and crypto companies spending millions on Super Bowl ads were some of the most obvious signals that the bubble was nearing a pop.
Did my portfolio escape 2022 unscathed? Absolutely not. However, I’m thankful to have avoided the major landmines. Here’s my plan going forward:
Continue to dollar cost average into low cost index funds via tax-advantaged and tax-exempt retirement accounts every 2 weeks on payday. Automating these contributions remains one of the best low effort, high impact actions I’ve ever undertaken
Continue to max out HSA and ESPP contributions every 2 weeks on payday. Again, automating these has been key
Use my brokerage accounts to opportunistically purchase stock in businesses that display the following characteristics: strong outlook for earnings and free cash flow growth, durable competitive advantages, attractively valued
Increase cash in emergency savings account to 9+ months of expenses. Given the state of the economy, it’s prudent to prepare for potential layoffs in the coming months. Hoping for the best, but prepared for the worst
Purchase $10k in I bonds. In a high-inflation environment, I bonds are increasingly attractive — currently paying nearly 7% in interest
Hold off on major purchases (new car, home, etc.) until the smoke clears
What I’m watching, reading, & listening to
Shaq docuseries (HBO Max) — some good interviews and lots of life lessons. An enjoyable watch overall
Madoff: The Monster of Wall Street (Netflix) — I was already familiar with the Ponzi scheme, but this series provided a highly detailed overview. It’s incredible that he conned so many into thinking they could have riskless return
The Last of Us (HBO Max) — season premiere was outstanding. HBO got another winner
Slides from Stanford’s "Personal Finance for Engineers" course. A fantastic, actionable resource for anyone looking for personal finance material
The FADER recently profiled Babyface Ray. His sophomore album, MOB, was one of my favorite projects last year
Solid Twitter thread from Patrick O'Shaughnessy and Buck on software investing
Ted Gioia wrote a great post on Barnes & Noble’s improbable turnaround
Sango dropped a compilation of his remixes from the past handful of years on SoundCloud. Can’t recommend this enough
The Happiness Expert That Made 51 Million People Happier: Mo Gawdat. Shouts out to a couple friends of the blog (you know who you are) for the plug on this one
ACTION BRONSON'S 2ND ANNUAL FTD BLOCK PARTY IN BROOKLYN (YouTube) — can always count on Action to deliver good eats and laughs
2023 Predictions
The Boston Celtics win the NBA championship
S&P 500 returns over 10% for the full year
The North Face overtakes Arc’teryx as the gorpcore brand of choice
Van Cleef replaces Chrome Hearts as the most referenced brand in hip hop
I’ll revisit these next January.