Looking back at a year gone by is almost as dangerous as attempting to look forward that far, but maybe a little less pointless. The danger in both cases is that what you see so often depends on what you are looking for, but even so, just an attempt at an objective assessment of the past can help to understand conditions in the future. It is, then, with an appropriate sense of my own limitations that I look back at 2018 for clues and lessons to be learned.
When you pause for sober reflection at times like this, it often enables you to put things in perspective. Recency bias ensures that our view of the previous twelve months is colored by what we feel right now, whereas the reality is usually that current conditions are just one of many phases throughout the year. It is easy this year, for example, to focus on the current sense of fear in the market and say that that has been the defining mood of 2018, especially as it is the second such panic attack this year.
In terms of time though, we had two months of selling at the beginning of the year and three months at the end, leaving seven months of steady gains in the middle. That is no consolation to investors of course. The drops were much more rapid, easily outdoing the gains, and, as we are frequently reminded right now, that leaves stocks down overall on the year. There is, however, hope.
The remarkable thing here is that if you look at the reasons for the two big drops, they are essentially the same. Back at the end of January, three concerns dominated the headlines, rising interest rates, fear of a trade war, and slower global growth. If that sounds familiar, it’s because the same things that are troubling the market now. The fact that those fears proved to be unfounded then doesn’t automatically mean that they will be this time, or the next, whenever that comes, but it should help you to understand that blanket coverage and unanimity of thought do not make a conclusion inevitable.
If anything, as I pointed out in this piece, written and published at the end of September just before the big drop in both oil and stocks began, when everybody agrees on something, it makes the opposite far more likely. That contrarian attitude led to me saying back then that with everyone saying that stocks and oil were going a lot higher, it was probably a good time to short both, or at least prepare for a drop in some way. The S&P 500 closed that day at 2,913.98 and WTI futures at $73.56 a barrel as opposed to closes of 2,467.42 and $46.22 yesterday, so they weren’t bad calls.
That, though, is an example of what I talked about earlier, finding what you are looking for, and if looking back at a year is to be a useful exercise, we must also look for where we got things wrong. That is a skill that traders learn early in their careers. Trading is essentially about risk management and mitigation, and that can only be achieved if you accept that you will get things wrong…frequently. If you are too arrogant to believe that could ever happen, why bother with things like stop losses? You know you are right, so it is only a matter of everyone else seeing the light, then everything will be okay, right?
That is the attitude that led to the most epic trading failures of all time such as Nick Leeson, or the London Whale. Your mileage may vary, as they say, and it is unlikely that your inability to accept that you are fallible will bring down a bank or cost billions, but unchecked, it can hurt all the same. With that in mind, I also go looking for things I got wrong this year. Unfortunately, they aren’t that hard to find.
In my defense, the main fault, throughout the year as well as on this move, has been a tendency to look to take a profit or buy on dips a bit early. That is what led me to conclude, for example, that after a big drop, a post-election bounce was likely some time in November. It is also why I have been casting around a bit for bargains over the last few weeks, most of which are, to put it nicely, even better value now.
To be fair though, some picks made during the drop earlier in the year also looked less than stellar for a while, but fairly quickly turned out to be good trades. Amazon (AMZN), for example, didn’t jump immediately after this article, but was over forty percent higher six months later, and is still above where it was at the time, even after the recent collapse.
If I look back at 2018, it is a mixed bag, but that is always the case for traders and investors everywhere. The important thing is to take everything into account, to acknowledge failures as well as successes. If you do that, you can go into the new year armed with a little more knowledge and a bit more experience, and that should make for what I wish you all, a happy and prosperous 2019.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.