12 Lessons the Market Taught Investors in 2023

Lesson
1:
No
One
is
Very
Good
at
Market
Forecasts

The
only
value
in
market
strategist
forecasts
is
they
show
that
a
wide
dispersion
of
outcomes
is
possible.
The
S&P
500
ended
2022
at
3,839.50.
The
forecasts
of
23
analysts
from
leading
investment
firms
for
year-end
2023
ranged
from
as
low
as
3,650
(down
5%)
to
as
high
as
4,750
(up
24%).
The
average
forecast
was
for
the
S&P
500
to
end
the
year
at
4,080
(up
6%).
It
closed
the
year
up
26.4%.

The
following
chart
from
Avantis
shows
that
not
only
is
such
a
wide
dispersion
of
potential
outcomes
likely,
but
the
median
forecast
is
typically
wrong
by
a
wide
margin.

Consensus
S&P
500
Estimates
vs.
Actual
Returns
(2018-2023)

The
lesson
is
that
investors
are
best
served
by
following
Warren
Buffett’s
advice
on
guru
forecasts:
“We
have
long
felt
that
the
only
value
of
stock
forecasters
is
to
make
fortunetellers
look
good.
Even
now,
Charlie
[Munger]
and
I
continue
to
believe
that
short-term
market
forecasts
are
poison
and
should
be
kept
locked
up
in
a
safe
place,
away
from
children
and
also
from
grown-ups
who
behave
in
the
market
like
children.”

The
lesson
is
an
especially
important
one
because
investors,
like
all
humans,
are
subject
to
confirmation
bias.
Thus,
when
we
hear
a
forecast
that
confirms
our
own
beliefs
or
concerns,
we
are
more
likely
to
act
on
it
than
if
we
hear
a
contrary
opinion.

Lesson
2:
The
‘Magnificent
7’
is
a
Bit
Misleading

Three
of
the
“Magnificent
Seven”
companies
(Tesla
[TSLA],
Alphabet
[GOOGL],
and
Amazon.com
[AMZN])
ended
2023
below
their
closing
price
at
the
end
of
2021.

Only
three
(Apple
[AAPL],
Microsoft
[MSFT],
and
Nvidia
[NVDA])
outperformed
riskless
one-month
Treasury
bills,
which
returned
3.2%
per
year
over
the
period.

Magnificent
Seven
Stocks
2021
and
2023
Closing
Prices

While
the
S&P
500’s
return
for
2023
was
26.4%,
the
performance
of
the
Magnificent
Seven
was
responsible
for
most
of
the
returns,
as
their
average
total
return
was
104.7%,
accounting
for
more
than
62%
of
the
S&P
500’s
performance.

That
performance
was
greatly
affected
by
investor
fascination
with
the
“AI
story.”
But
history
provides
cautionary
warnings
about
sky-high
valuations
driven
by
stories.
A
recent
example
is
that
Lidar
(autonomous
vehicle
technology)
stocks
have
collapsed
by
85%
from
their
peak.
The
valuations
of
the
Magnificent
Seven,
with
an
average
price-to-earnings
of
50,
are
now
reminiscent
of
the
high
valuations
of
the
Nifty
50
and
the
dot-com
stocks
just
before
crashing.
While
not
a
forecast
of
a
crash,
it
is
a
warning
that
at
the
very
least
these
stocks,
which
currently
make
up
about
30%
of
the
total
market
cap
of
the
S&P
500,
are
at
historically
extreme
valuations.
Fortunately,
the
rest
of
the
market
has
valuations
that
are
much
closer
to
their
historical
averages.

The
lesson
is
that
it
is
very
difficult
for
highly
valued
companies
to
continue
to
outperform
over
the
long
term.
The
reason
is
that
the
empirical
evidence
demonstrates
that
abnormally
high
growth
in
earnings
tends
to
revert
to
the
mean
at
a
rate
of
about
40%,
and
real-world
forecasts
tend
to
underestimate
the
speed
at
which
reversion
to
the
mean
in
profitability
occurs.
Another
lesson
is
that
while
story
stocks
may
be
fascinating,
they
typically
don’t
make
for
great
investments.

Lesson
3:
Don’t
Use
Valuations
to
Time
Markets

We
entered
2021
with
equity
valuations
at
a
high.

In
particular,
the
popular
metric
known
as
the

Shiller
Cyclically
Adjusted
PE
Ratio
10 –
a
measure
of
price
to
earnings
based
on
real-per
share
earnings
over
a
ten-year
period
– was
about
34
for
US
stocks,
well
above
the
historical
average
of
about
17.
We
had
been
above
that
just
one
other
time
(in
the
late
1990s)
and
that
was
followed
by
a
severe
bear
market.

That
led
many
forecasters
to
predict
poor
returns.
For
example,
“legendary”
investor
Jeremy
Grantham,
long-term
investment
strategist
at
GMO,
predicted
2021
would
see
a
stock
market
crash:
“when
the
decline
comes,
it
will
perhaps
be
bigger
and
better
than
anything
previously
in
US
history,”
he
has
said.
Investors
who
listened
to
that
advice
and
sold
equities
missed
out
on
the
market’s
strong
performance
that
year.
Vanguard
S&P
500
ETF

VOO
returned
28.8%!

That
strong
performance
drove
the
CAPE
10
to
38.3,
even
higher
than
its
historical
average.
In
2022,
the
S&P
500
performed
poorly,
losing
18.1%.
But
that
loss
still
left
the
CAPE
10
at
28.3,
again
leading
many
to
predict
a
year
of
poor
performance.
Defying
such
forecasts,
the
S&P
500
returned
26.4%
in
2023.

While
valuations
provide
valuable
information
about
future
expected
returns
over
the
long
term
(there’s
about
a
0.4
correlation
between
the
two
over
10-year
periods),
that
doesn’t
mean
you
can
use
that
information
to
time
markets.
The
evidence
shows
such
efforts
are
likely
to
fail.

This
doesn’t
mean,
however,
that
the
information
has
no
value.
You
should
use
valuations
to
provide
estimates
of
returns
so
you
can
determine
how
much
equity
risk
you
need
to
take
in
your
portfolio
to
have
a
good
chance
of
achieving
your
financial
goals.
But
expected
returns
should
be
treated
only
as
the
mean
of
a
potentially
wide
dispersion
of
outcomes.
Your
plan
should
address
any
of
these
outcomes,
good
or
bad.

Lesson
4:
it
Takes
Discipline
to
Stay
the
Course

All
strategies
that
entail
investing
in
risk
assets
are
virtually
guaranteed
to
experience
long
periods
of
underperformance.
If
you
doubt
that,
consider
that
the
S&P
500
has
experienced
three
periods
of
at
least
13
years
when
it
underperformed
riskless
one-month
Treasury
bills
(1929-43,
1966-82,
and
2000-12).
To
gain
the
benefits
of
diversifying
away
from
traditional
60/40
portfolios,
you
must
have
the
discipline
to
stay
the
course
(and
even
rebalance)
during
periods
of
negative
performance.

Lesson
5:
Assets
Have
Self-Healing
Mechanisms

When
risk
assets
have
poor
returns,
it
is
usually
attributable
to
a
combination
of
poor
performance
(falling
earnings
or
producing
losses)
and
falling
valuations.
Because
the
best
predictor
we
have
of
future
equity
returns
is
the
earnings
yield
(the
inverse
of
the
P/E
ratio,
or
E/P),
falling
valuations
mean
that
future
expected
returns
are
now
higher.
Investors
subject
to
recency
bias
fail
to
understand
that,
leading
them
to
sell
instead
of
buying.

Falling
valuations
are
a
“self-healing”
mechanism.
For
example,
after
underperforming
one-month
Treasury
bills
from
2000
through
2012,
the
CAPE
10
had
fallen
to
21.2
from
44.2.

From
2013
through
2021,
the
S&P
500
returned
12.6%
per
year,
outperforming
one-month
Treasury
bills
by
11
percentage
points
per
year.
Similarly,
the
S&P’s
loss
of
18.1%
in
2022
resulted
in
the
CAPE
10
falling
to
28.3
from
38.3.

The
lesson
for
investors
is
to
remember
self-healing
mechanisms
are
at
work
after
periods
of
poor
performance.
Sophisticated
investors
know
that
the
winning
strategy
is
to
avoid
being
subject
to
recency
bias
and
to
follow
Warren
Buffett’s
advice
to
avoid
market
timing,
but
if
you
cannot
resist
“be
fearful
when
others
are
greedy
and
be
greedy
only
when
others
are
fearful.”

Lesson
6:
Even
With
a
Crystal
Ball,
Markets
Are
Wild 

Imagine
that
on
January
1
2023,
you
were
provided
with
a
crystal
ball
that
would
enable
you
to
see
the
major
geopolitical
and
economic
events
of
the
coming
year.

Given
what
happened,
it’s
hard
to
imagine
any
investor
would
have
predicted
that
the
S&P
500
would
rise
26.4%.
And
it
is
likely
that
many
investors
would
have
sold
equities
given
the
negative
news
that
was
coming.

The
lesson
is
that
even
if
you
could
accurately
predict
events,
you
should
not
try
to
time
markets
based
on
forecasts.

Lesson
7:
Don’t
Let
Politics
Influence
Decisions

One
of
my
more
important
roles
as
head
of
financial
and
economic
research
at
Buckingham
Wealth
Partners
is
helping
to
prevent
investors
from
committing
“portfolio
suicide”:
panicked
selling
resulting
from
fear,
whatever
its
source,
including
the
political
arena.

We
often
make
mistakes
because
we
are
unaware
that
our
decisions
are
being
influenced
by
our
beliefs
and
biases.
The
first
step
to
eliminating,
or
at
least
minimising,
such
mistakes
is
to
become
aware
of
how
our
choices
are
affected
by
our
views,
and
how
those
views
can
influence
outcomes.
The
2012
study

Political
Climate,
Optimism,
and
Investment
Decisions
by
Yosef
Bonaparte,
Alok
Kumar,
and
Jeremy
Page,
showed
that
people’s
optimism
toward
both
the
financial
markets
and
the
economy
is
dynamically
influenced
by
their
political
affiliation
and
the
existing
political
climate.

Now,
imagine
the
nervous
investor
(and
I
have
had
discussions
with
many
of
them,
all
of
whom
were
Republicans)
who
reduced
their
allocation
to
equities
(or
even
eliminated
them)
based
on
views
about
the
Joe
Biden
presidency,
Democratic
control
of
the
Senate,
and
the
exploding
budget
deficits
(among
other
concerns).

While
investors
who
stayed
disciplined
benefited
from
the
market’s
very
strong
performance,
those
who
panicked
and
sold
not
only
missed
out
on
that
strong
performance
but
persistently
faced
(and
continue
to
face)
the
incredibly
difficult
task
of
figuring
out
when
it
would
be
safe
to
invest
again.
Similarly,
I
know
of
many
investors
with
Democratic
leanings
who
were
underinvested
after
President
Donald
Trump
was
elected.

The
lesson
to
ignore
your
political
views
when
making
investment
decisions
is
one
that
rears
its
head
after
every
presidential
election.
The
election
of
2024
will
be
no
exception.
Remember
to
express
your
views
with
your
votes,
not
with
your
investments.
Forewarned
is
forearmed.

Lesson
8:
Most
Returns
Were
Earned
in
Short
Periods

Over
the
first
10
months
of
2023,
small
caps
performed
poorly.
For
example,
Vanguard
Russell
2000
ETF
(VTWO)
produced
a
return
of
negative
4.4%
and
Avantis
Small
Value
ETF
AVUV
returned
just
0.8%.
Both
far
underperformed
(VOO),
which
returned
10.6%.

Impatient,
undisciplined
investors
and
those
subject
to
recency
bias
may
have
abandoned
their
investments
in
small
and
small-value
stocks.
Over
the
next
two
months,
VOO
returned
14.2%,
VTWO
returned
22.4%,
and
AVUV
returned
21.9%.

The
historical
evidence
demonstrates
that
this
is
the
norm.
For
example,
over
the
97-year
period
from
1927
through
2023,
the
S&P
500
returned
10.3%
annualised.
If
we
were
to
remove
the
returns
of
the
highest-returning
97
months,
what
would
you
guess
was
the
return
of
the
remaining
1,067
months?

Most
investors
would
be
shocked
to
learn
that
the
answer
is
virtually
zero.
The
remaining
1,067
months
provided
an
average
annual
return
of
just
0.01%.
The
best
97
months
(just
8.3%
of
the
months)
provided
an
average
annual
return
of
10.4% –
more
than
100%
of
the
annualised
return
over
the
full
period!

The
lesson
for
investors
is
that
the
ability
to
avoid
the
temptation
to
chase
recent
performance
is
a
necessary
ingredient
for
investment
success.

Lesson
9:
2023’s
Winners
Might
be
This
Year’s
Dogs

The
historical
evidence
demonstrates
that
individual
investors
are
performance-chasers –
they
buy
yesterday’s
winners
(after
the
great
performance)
and
sell
yesterday’s
losers
(after
the
loss
has
already
been
incurred).
This
causes
investors
to
buy
high
and
sell
low –
not
a
recipe
for
investment
success.

As
I
wrote
in
my
book

The
Quest
for
Alpha that
behaviour
explains
the
findings
from
studies
that
show
investors
can
underperform
the
very
mutual
funds
they
invest
in.
Unfortunately,
a
good
(or
poor)
return
in
one
year
doesn’t
predict
a
good
(or
poor)
return
in
the
next.
In
fact,
great
returns
lower
future
expected
returns,
and
below-average
returns
raise
future
expected
returns.

Lesson
10:
Active
Management
is
a
Loser’s
Game

Last
year
was
another
in
which
most
active
funds
underperformed
even
though
the
industry
claims
that
active
managers
outperform
in
bear
markets.
In
addition
to
the
advantage
of
being
able
to
go
to
cash,
active
managers
had
a
great
opportunity
to
generate
alpha
through
the
large
dispersion
in
returns
between
2023’s
best-performing
and
worst-performing
stocks.
For
example,
while
the
S&P
500
returned
26.4%
for
the
year,
including
dividends,
in
terms
of
price-only
returns,
the
stocks
of
10
companies
were
up
at
least
64.9%.

To
outperform,
all
an
active
manager
had
to
do
was
overweight
those
big
winners.
On
the
other
hand,
10
stocks
lost
at
least
32.4%
(underperforming
the
S&P
500
by
almost
59
percentage
points).
To
outperform,
all
an
active
manager
had
to
do
was
underweight
or
avoid
these
dogs.

This
wide
dispersion
of
returns
is
not
at
all
unusual.
Yet,
despite
the
opportunity,
year
after
year
in
aggregate,
active
managers
persistently
fail
to
outperform.

Lesson
11:
Diversification
is
Always
Working

Everyone
is
familiar
with
the
benefits
of
diversification.

Done
properly,
it
reduces
risk
without
reducing
expected
returns.
But
once
you
diversify
beyond
a
popular
index
such
as
the
S&P
500,
you
must
accept
the
fact
you
will
almost
certainly
be
faced
with
periods
(even
long
ones)
when
a
popular
benchmark
index,
reported
by
the
media
daily,
outperforms
your
more
diversified
portfolio.
The
noise
of
the
media
will
then
test
your
ability
to
adhere
to
your
strategy.

Of
course,
no
one
ever
complains
when
their
diversified
portfolio
experiences
positive
tracking
variance
(that
is,
it
outperforms
the
popular
benchmark).
The
only
time
you
hear
complaints
is
when
it
experiences
negative
tracking
variance
(that
is,
it
underperforms
the
benchmark).
Successful
investing
requires
the
discipline
and
patience
to
keep
you
from
abandoning
your
long-term
plan.

Lesson
12:
Innovations
Are
Not
Always
Investments

The
year
2023
witnessed
the
fall
of
several
companies
that
were
once
heralded
as
pioneers
of
innovation.
WeWork
declared
bankruptcy
in
November.
It
was
valued
in
2019
at
$47
billion
in
a
round
led
by
Masayoshi
Son’s
Softbank
(SFTBY).
It
eventually
went
public
in
2021,
with
a
valuation
of
$9.4
billion
via
a
special-purpose
acquisition
company.

Bird,
an
electric
scooter
company
that
was
heralded
as
a
vanguard
in
the
new
“sharing”
economy
and
was
valued
at
$2.5
billion
in
2019,
declared
bankruptcy
in
December.
Even
Instant
Brands,
the
firm
behind
a
cultural
kitchen
phenomenon
(and
the
maker
of
Instant
Pot),
filed
for
bankruptcy.
Their
innovations
were
not
enough
to
immunise
them
against
economic
slumps,
slowing
sales,
management
missteps,
and
myriad
other
issues
that
caused
their
demise
and
the
ultimate
destruction
of
immense
shareholder
value.

The
views
expressed
here
are
the
author’s.
Larry
Swedroe
is
head
of
financial
and
economic
research
for
Buckingham
Wealth
Partners,
collectively
Buckingham
Strategic
Wealth,
LLC
and
Buckingham
Strategic
Partners,
LLC.

For
informational
and
educational
purposes
only
and
should
not
be
construed
as
specific
investment,
accounting,
legal,
or
tax
advice.
Certain
information
is
based
on
third-party
data
and
may
become
outdated
or
otherwise
superseded
without
notice.
Information
from
sources
deemed
reliable,
but
its
accuracy
and
completeness
cannot
be
guaranteed.

Investors
should
carefully
consider
any
fund
investment
risks
and
investment
objectives.
Certain
funds
may
not
be
appropriate
for
all
investors
and
are
not
designed
to
be
a
completed
investment
program.
As
such,
this
article
does
not
constitute
a
recommendation
to
purchase
a
specific
security
and
it
should
not
be
assumed
that
the
securities
referenced
herein
were
or
will
prove
to
be
profitable.
No
strategy
assures
success
or
protects
against
loss.

Performance
is
historical
and
does
not
guarantee
future
results.
All
investments
involve
risk,
including
loss
of
principal.
Individuals
should
speak
with
their
qualified
financial
professional
based
on
their
own
circumstances
to
discuss
the
ideas
presented
in
this
article.