The Weekend Edition is pulled from the daily Stansberry Digest.
As 2022 began, we couldn't have predicted what lay ahead...
Everywhere you looked last year – geopolitics, crypto, bonds, stocks – some new unforeseen event left our jaws hanging open...
Even with Russian President Vladimir Putin's army lining up on the Ukraine border, people I know who lived there at the time weren't worried about him invading. They didn't think it would happen... and were shocked to be awakened on the morning of February 24, 2022 by the sound of exploding shells.
It didn't just catch the rest of the world by surprise. It caught most of Ukraine by surprise.
Or consider the collapse of the now-bankrupt crypto exchange FTX and the downfall of its co-founder and former CEO, Sam Bankman-Fried. I admit I didn't see this one coming... nor did anyone else.
I bet most folks would've never expected Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), Meta Platforms (META), and Tesla (TSLA) to each lose more than $750 billion in market cap last year. That works out to a combined loss of more than $5 trillion from their all-time highs.
But that's exactly what happened.
We could fill many Stansberry Digest essays with such examples of unforeseen events. It's why I've consistently repeated my investment mantra, "Prepare, don't predict."
It's one thing to understand that the future is unknowable and that most forecasts and predictions are doomed. But maybe it's even more important to know real knowledge from fake knowledge...
This idea is best illustrated by an old joke about Max Planck...
Planck was a German theoretical physicist who won the Nobel Prize in 1918. He is most famous for giving birth to quantum physics.
After winning his Nobel Prize, Planck toured Germany in a chauffeured car and delivered the same lecture on the new science of quantum mechanics everywhere he visited.
Planck's chauffeur would sit in the back as he lectured. And eventually, the chauffeur had it memorized. One day, he said...
Would you mind, Professor Planck, because it's so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur's hat?
Planck agreed. After they pulled into Munich, the chauffeur took the podium and gave the lecture without a hitch.
In the question-and-answer session that followed the lecture, the first question was asked. And the chauffeur said...
Well, I'm surprised that in an advanced city like Munich I get such an elementary question. I'm going to ask my chauffeur to reply.
Planck had real knowledge of quantum physics. He created the whole field and understood it better than anyone in the world at that time... which is why he could answer any question about it.
The chauffeur didn't know anything about physics. He was faking it.
The chauffeur could have been reciting Shakespeare's soliloquies and he would've demonstrated the same type of knowledge – the fake kind.
The cleverest thing he did was redirect the question to the real physics expert in the room without revealing himself as a fake. That took real talent.
Too many investors nowadays still don't understand that they were faking it in the bull market...
It's just too hard for human beings to buy stocks in a raging bull market, see those stocks soar in value, and not conclude that they possess real financial knowledge.
Today, despite the bear market rout, the market chauffeurs' memories of making big, fast money are still fresh. They were smart enough to make a fortune the first time. So they think that, despite losing most – if not all – of their gains, they can make back all their money again at any time.
After all, they had sophisticated investment theses just like real professional investors...
They created a "short squeeze" in heavily shorted stocks, like GameStop (GME) and AMC Entertainment (AMC). They bought, and they sold. They discussed their ideas in public on social media platforms, just like many wealthy, successful investors do.
But when the market questioned them the way the audience member questioned the chauffeur, they didn't have the investor equivalent of Max Planck sitting in the room to bail them out.
They just lost money...
The chauffeur investors' favorite stocks have been crushed...
From their all-time highs to the end of 2022, Tesla was down 70%, Peloton Interactive (PTON) had dropped 95%, GameStop was off nearly 80%, and AMC Entertainment had fallen 94%.
Narrative and enthusiasm lead to big losses. They're not substitutes for understanding or recognizing and controlling risk. That's the kind of real knowledge that investors must possess to avoid catastrophe and earn adequate returns.
In an episode of my Stansberry Investor Hour podcast, my old friend Rick Rule, the founder of Rule Investment Media, noted the bull market tendency to rely on chauffeur-type knowledge – storytelling and price action.
But now, Rick said, investors "need to do the arithmetic." He's the Max Planck of natural-resource investing, so he ought to know.
The folks who are doing the arithmetic on thousands of companies, putting real money to work, losing some of it, learning from their mistakes, then finding some success... they are the Max Plancks of investing. And we should pay attention to what they're doing with their own money and their clients' money right now.
By the end of last year, the folks who do the arithmetic for a living were selling – while chauffeurs were buying the dip...
As the Wall Street Journal reported on December 18...
U.S. equity mutual and exchange-traded funds, which are popular among individual investors, have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.
Hedge funds, meanwhile, have been paring how much risk they are taking in stocks or making outright bets that major U.S. indexes will tumble. Mutual funds have increased their cash positions to about 2.5% of their portfolios this fall, up from around 1.5% at the end of last year and the highest level since early 2020, according to Goldman Sachs.
That makes me pause.
For years, institutional investors have been the driving force in the stock market. But the meme-stock revolution of the past couple years changed that, at least somewhat. So, maybe the professionals were on the wrong side of the bet this time...
Of course, even though they created big short squeezes in meme stocks, the market chauffeurs ultimately held on for huge losses. And they were on the wrong side of the crypto trade as well. The industry has melted down, lighting a couple trillion dollars on fire.
So maybe it's a bad idea to suggest retail investors are back as a force in the markets. Maybe they're the same force they've been for years now – a source of liquidity for people who know 10 times more about how markets really work.
It'll take some more pain for these market chauffeurs to start acquiring real knowledge. Real knowledge takes hard work and doesn't come easily. And real knowledge about the stock market is usually accompanied by a substantial amount of pain in the form of losses.
In today's world, it's hard to say, "I don't know"...
The more folks refuse to say it, the more powerful the incentive is to fit in and fake it. That's because the deluge of knowledge in the connected modern world encourages chauffeur-like behavior...
Whether at home, at work, or anywhere else, the constant bombardment of information creates more pressure to act like we know it all.
The constant message is "you should know... you should know... you should know." You feel guilty for not knowing something about every new topic that pops up in the headlines. It feels stupid and wrong to admit you don't know.
But it's so right...
In the modern world where the illusion of knowledge is everywhere, describing a clear boundary between knowledge and ignorance is valuable. It calls to mind Warren Buffett's famous "circle of competence" advice from his 1996 Berkshire Hathaway (BRK-B) shareholder letter...
What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
The circle is as much about what's outside it as what's inside. It's about what you don't know as much as what you do know.
Believe it or not, 2022 was a mercifully good year to learn painful lessons...
The stock market didn't suffer a swift, steep crash. Rather, it fell in an orderly manner, punctuated by occasional rallies.
Each leg down was a learning experience. Each rally gave investors a chance to exit their mistakes and raise cash... which, if they did, would have put them in much better shape to weather the next leg down.
We should expect more of the same.
A couple more years of market action like what happened in 2022 will likely compel at least some market chauffeurs to hit the books and learn to do some arithmetic. And it'll probably wash the rest of them out of the market for an entire generation.
Get ahead of them. Stop doing whatever made you money in the bull market... and start doing more arithmetic.
And if you know anybody still wearing a chauffeur's cap, tell them to hang it up and learn to be like Max Planck instead.
Editor's note: Dan says a market event 50 years in the making is now underway. It could shake up nearly every asset you own... and impact the cost of everything you buy day to day. But if you know how to act on this financial shift, it has once-in-a-lifetime potential to boost your retirement gains. That's why on Thursday, March 2, Dan is stepping forward to explain where this opportunity is hiding... To get all the details, click here.