Rate of Return by Austin Hankwitz

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We're in a Bear Market (Playbook)
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We're in a Bear Market (Playbook)

Explaining my rationale for this title as well as introducing ways to hedge.

Austin Hankwitz
Jan 25
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“People get smarter but they don’t get wiser. They don’t get more emotionally stable. All the conditions for extreme overvaluation or undervaluation absolutely exist, the way they did 50 years ago. You can teach all you want to the people, you can tell them to read Ben Graham’s book, you can send them to graduate school, but when they’re scared, they’re scared.”

— Warren Buffett, on why most investors fail

Well, it’s official.

After the fastest V-shaped recovery in history, the stock market (in my humble opinion) is officially in a bear market. Over the last 3 weeks the Dow Jones Industrial Average has declined by -7%, the S&P 500 has declined by -9%, and the Nasdaq has declined by -13%.

Among the most glaring “yikes” is the terrible performance of Cathie Wood’s ARKK ETF — an ETF that tracks the high-octane growth stocks. ARKK has declined -54% since hitting an all-time high in February.


In this post, we’ll cover:

  • How we got here

  • How I’m navigating this bear market

  • How to think about this from a ‘wealth building’ perspective


How We Got Here

If you joined my Twitter Spaces with Sylvia Jablonski (CIO of Defiance) and Chris Sommers (CEO of Unhedged) from the other week, you might remember my play-by-play explanation of exactly how the market reached new all-time highs. Here’s a transcript from the recorded discussion:

“Let’s rewind almost 2 years ago now to when the pandemic first began in March of 2020. The Federal Reserve lowered interest rates down to zero percent and launched a massive $700 billion dollar quantitative easing program. By lowering interest rates, the Fed was doing their part in trying to encourage consumers to borrow more money — therefore spending more money.

As you all remember, no one was really spending. No spending = businesses don’t make money = can’t pay employees = a terrible economy. So by lowering interest rates they were pretty much saying ‘go take out debt and spend spend spend!’

So how did they go about lowering the rates? Through open market operations, when the Fed begins spending billions and billions of dollars buying bonds, they are able to lower rates. 

With lower interest rates, corporations could borrow more cheaply, people were spending more money… increasing the revenue for these businesses dramatically which in turn drove higher their FCF and valuations. The result? The stock market is having a grand ole time again.”

A few other catalysts for how we got to these sky-high valuations:

  • Record number of SPACs created — SPAK ETF

  • Retail / meme stocks — MEME ETF

  • Insane IPO price pops upon trading driven by retail demand (ABNB, SNOW)

  • Work from home / digital secular growth trends driving valuations higher

Let me be very clear — there are countless companies who have hit the public markets over the last 2 years who will outperform over a 5-7 year period of time. There are countless companies who are trading for pennies on the dollar now because investor sentiment is trending lower.

I do not want to discount the validity of a company like Coinbase, Airbnb, or Upstart just because their stocks have fallen -46%, -24%, or -75% respectively throughout the last year.

If you need some help seeing these stocks as actual businesses, read my post below.

Rate of Return by Austin Hankwitz
My Favorite Stocks in Charts: 1/20/22
Wow! I’m incredibly humbled by the positive feedback my recent post detailing Glassdoor’s Best Places to Work in relation to the stock market. Over 20,000 people read that post in 24 hours — with 314 of them then sharing it with their friends online…
Read more
4 months ago · 12 likes · Austin Hankwitz

However, I will discount the validity of pre-revenue companies like QuantumScape (QS) who hit the market — then 10X’ed in price in only 2 months. Another terrible example of this was the pre-revenue scam Nikola Motors (NKLA). Embarrassed I fell for that one, even though I made out like a bandit.

I want to bring light to a fantastic summation of a the current macro environment published by my friend Kyla Scanlon here — uncertainty.

I’m not sure if you remember me saying this, but I certainly try to mention this word here and there when describing a company’s revenue if it’s applicable — and that word is predictable.

Investors love consistent and predictable revenue. Which means the companies with predictable revenue will be able to withstand a broader market sell-off better than those without it. Think about Proctor & Gamble, a company I covered in the most recent Week in Review — they sell laundry detergent, paper towels, tooth brushes, diapers, and other essential products.

They’ve been increasing their revenue by mid-single digits every year since 2016 and will likely continue on this trend through 2026. From the perspective of an investor, that’s reassuring and feels good to know — I’d assign value to that.

Which is exactly what the market has done — PG stock is down only -0.5% YTD while the S&P 500 is down -7.8% YTD.

Uncertainty = a sell off.

Extreme uncertainty (pre-revenue, pre-FCF, pre-profits, etc.) = a massive sell off.

An example of extreme uncertainty is what has been happening with Affirm’s stock price. The company operates in a completely new business called “Buy Now Pay Later,” they’ve received a few reports citing uncertainty with customers paying back the borrowed amounts, and most importantly they’re not exactly profitable or even FCF positive.

Affirm’s stock has sold off -43% YTD. Investors want nothing to do with a company with this much uncertainty.

It seems like investors’ risk appetite peaked in February across these “new” growth stocks — as seen with ARKK’s price action.

And as seen by Jamin Ball’s (Clouded Judgement) chart below, we still have a ways to go until valuations are back to “pre-COVID” levels. For me, the main question remains..

Should we be trading back at or below pre-COVID levels?

Well, the answer is yes and no.


How I’m Navigating this Bear Market

The chart below tells an incredible story that we all need to completely understand to be successful over the coming 3-5 years in the market. This image illustrates the upmost importance that valuation multiples have as key drivers of stock prices over a long period of time.

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