Mark Lister, 1 February 2022

After 18 months or so of plain sailing, financial markets have run into some bad weather. This year will be a harder slog, and some of the newer investors out there will learn some harsh, but important, lessons.

US shares are headed for their worst start to a year since 2009, with the higher growth sectors getting hit hardest. Big tech is down almost 20 per cent from its November highs, while star fund manager Cathie Wood’s flagship ARK Innovation fund has more than halved in value from its 2021 peak.

Crypto markets haven’t been spared, with Bitcoin down 45 per cent from its November highs.

Experienced investors won’t be particularly troubled by all this, having seen it all before, but a new breed of DIY investor has emerged in recent years. The pandemic-induced lockdowns of 2020 are providing a further catalyst for this already burgeoning interest in the sharemarket.

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Wood’s ARK fund, a poster child for the COVID-era bull market, is revered by many of these new investors.

Having shot to fame from investing in the likes of Tesla, Zoom Video, Coinbase, Shopify and Robinhood, it had outperformed the S&P 500 by more than 200 per cent during the pandemic era at its peak. Today, it’s just five per cent ahead.

Cathie Wood has enjoyed huge success and her fund remains a great way to play the long-term innovation that humanity is known for.

However, less experienced investors who play in this space, without guidance and in a concentrated manner, need to be wary of the risks.

A lot of these companies are doing amazing things, but they tend to be high on opportunity and low actual profits.

Many are still growing as strongly as they ever have. It’s just that the market doesn’t want to pay nearly as much for that growth anymore.

In addition, many “old world” businesses that have been living in the shadow of their digital counterparts have found themselves in vogue more recently.

While much less exciting, these companies are often steady performers, generating reliable earnings and paying regular, predictable dividends.

There’s nothing wrong with that. Paul Samuelson, an American economist who won the Nobel Prize in 1970, once remarked that:

Investing should be like watching paint dry or watching grass grow

That’s why I think the market meltdown we’re seeing in some sectors is quite a healthy occurrence. It is refocusing investors on what really matters, which is earnings and profits, and the reliability of those.

This always has been, and always will be the ultimate driver of sharemarket returns (or those of any asset class, for that matter) over the long-term.

I think it’s great we’ve got a whole new generation of investors who are interested in companies with a genuine multi-decade growth plan, rather than simply screening for the highest 12-month dividend yield.

This is exactly what we need to broaden our markets, give productive businesses the capital they need to grow, and to shift our reliance away from housing as the investment of choice.

It will also help improve our financial literacy, as people are more incentivised to educate themselves.

However, there will be a learning curve for many. When markets are strong and just about everything is going up, making money feels straightforward and it’s easy to mistake luck for skill.

Investing is simple, but it’s not easy. Don’t bite off more than you can chew, and never be fooled into thinking you’ve got all the answers, because periods like this will prove you wrong.

This article was also published in the New Zealand Herald under the title 'Mark Lister: Harsh lessons for new investors'