The last 14 years…

In my 2022 Annual Letter, published earlier this month, I referenced a statement that I made in my 2021 Annual Letter:

“The returns from stocks and bonds during the next 13 years are likely to be much lower than during the last 13 years. With interest rates close to zero and stock valuations near all-time highs at year-end, the odds favor much lower returns going forward.”

In a similar vein, Howard Marks, co-founder and co-chairman of Oaktree Capital Management, and one of the five investors that have had the biggest influence on my thinking made the following comment today (January 18, 2023):

“We’ve gone through an easy period for the last 14 years, and I believe that the coming period will be a harder period. Not a cataclysm. Not a depression. But I think people don’t recognize that the last 14 years have been unusually easy. And I believe that the coming years will not be similarly easy.”

2022 was finally the year where it wasn’t quite so easy. From 2009-2021, interest rates went down and stocks went up. Times were good. Investing seemed easy if you just bought and held and did nothing.

Markets can be fickle, and there are bound to be plenty of surprises along the way. It seems unlikely that a 13-year boom will end with one bad year and then have us return to a more calm, less volatile environment. But we can’t ever know for sure.

What we can do is prepare. We can keep our return expectations more modest when planning for the future. And we can position ourselves mentally for more volatility—and be okay with it because, if you’ve prepared yourself ahead of time to handle volatility and not be forced to sell into it, volatility leads to opportunity. As Warren Buffett wrote in his 1993 Letter to Shareholders:

“The true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced ‘Mr. Market,’ an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That’s true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.”