At the end of each year, do you look back on the stock market and on your investment choices and think about how to do better next year? I do. So today, I’m thinking about my top investing rules to pursue in 2022.
Rule number 1: never forget 2020
I know this rule maybe sounds a year out of date now. But I’ll explain why it’s still especially important for me.
I’ve been banging on about the inevitability of stock market crashes for years. And I’ve always tried to invest as if a crash is coming. That means looking for safety and diversification, avoiding high-risk valuations, and all that. So I was properly prepared when the 2020 stock market crash hit, right?
Erm, not exactly. I was heavily weighted towards the financial sector, which is risky in a downturn. I wasn’t very well diversified either. And I held stocks I’d paid too much for. So did I remember that in 2021 and avoided making the same mistakes? Partly. But I also bought into some stocks that looked like they were recovering, prematurely. I paid too much. They fell again.
So in 2022, I’m going to try hard to not forget 2021, the year in which I didn’t properly stick to my rule to never forget 2020.
Rule number 2: never try to time the market
Yes, it’s a well-known investing rule that I’ve been following for years. It’s a key approach of ace investor Warren Buffett. And, well, pretty much all the successful long-term investors I’ve heard of. It’s also a key part of our philosophy here at The Motley Fool.
When we’re investing for decades, trying to time our entry and exit points is a waste of time. Well, that’s certainly my experience. My attempts at it have achieved nothing better than random results. I just don’t possess the skill to time the market. And I reckon almost nobody else does either.
But during the 2021 stock market turmoil, I’ve found it impossible not to think about timing. Almost every stock I’ve considered buying, and even the ones I did buy, my thoughts were… Is the timing right now, am I too soon, should I wait a bit longer?
Rule number 3: valuation is all that counts
Finally, at any point during 2021, the only thing that mattered was the valuation of a stock at that specific time. What had happened before meant nothing. How the price looked like it was moving meant nothing. And how low a share price was compared to pre-crash days meant nothing.
That last part is, I think, the most important. A stock is 60% down, so it must have a positive upside now? No, I had to keep reminding myself that such an assumption can be dangerous. At the very least, I try to account for a company’s balance sheet when evaluating a stock — it’s a thing called its enterprise valuation.
With inflated debts, and diluted equity, many companies are more highly valued now than before the crash on that basis, even though their share prices are down.
I do try to follow these three investing rules every year. But I will be especially mindful of them in 2022.