Are you “happy as a clam” with your stock returns in 2022? If you have money invested in the U.S. stock market, it’s probably hard to be happy at the moment. Instead of the positive returns that we’ve come to expect in recent years, the stock market has been falling into negative territory this year (down -7% at the time of writing). Tech stocks have been particularly hard hit this January.
So, happy as a clam? Probably not!
When you think about it, that old saying “Happy as a clam”, is really strange. Why exactly are clams happy? It’s not like anyone can have a conversation with a clam to talk about happiness!
As it turns out, the modern usage of the “Happy as a clam” has been shortened from its original form, “Happy as a clam at high tide.” Apparently, clams are happy at high tide when they’re safe and secure from land-based predators. Clams also feed at high tide (they’re filter feeders), so that could be another reason for their supposed happiness at high tide.
What happens at low tide though? Clams become vulnerable to land-based predators during low-tide, which means they’re probably not happy when the tide goes out.
Doesn’t this sound oddly familiar?
The Clam Investors
This nuance is the key to today’s post — Investors are a lot like clams. They’re happiest when the tide is high (aka the market is rising), but when the tide starts going out? Well, they’re less than happy. Sometimes investors even start to panic and sell when the market declines. Fear sets in, and they begin looking for safe places to hide. Just like a clam.
In the case of clams, at low tide they’ll dig deep into the sand and stay where it’s moist. They’re hiding and hoping that nobody with a shovel comes along. Investors mimic this clammy behavior — When the market starts sinking, they’ll dump the more speculative investments and hide in whatever sectors are deemed “safe”.
This is exactly why we’ve seen such large declines in tech stocks, and bitcoin this January. Investors now smell the end of high-tide and they’re running for the exits. Dumping more speculative assets for a “safe” hiding spot. Typically trying to “time the market” like this leads to sub-par returns, and investors frequently misjudge the timing of these movements.
The reality is, nowhere is truly “safe” when the investing tide is going out. Just like the expression “a rising tide lifts all boats”, a sinking tide is going to lower all boats too. Some stocks are going to sink more than others, but few will escape the ravages of a declining market. This is simply the true nature of markets.
Periods of boom and bust are perfectly normal occurrences in equity markets.
Don’t Be A Clam Investor
For me, the trick to being a happy investor in all kinds of markets is to simply not get pulled into the panic and fear of a falling market. I find some other metric to value my investments with. Something other than market price. There’s usually one or two metrics in every business to evaluate, which are entirely independent of market conditions.
What kind of metrics? It totally depends upon the kind of investment!
If you’re invested in an S&P 500 index fund, you might look at the book value per share of the S&P 500. This number rarely goes down, and that’s because the 500 largest firms are almost always building stuff and earning profits. They’re taking cash profits and investing in new businesses, new factories, and new equipment around the world. And rarely does the entire S&P 500 become unprofitable. Even during the worst recessions (like the Great Depression) there were still enough companies making money that the average earnings for the index was still positive.
If it’s a retail stock you’re invested in (like The Home Depot), you might count the number of stores built instead of worrying over the stock price. Typically the number of stores is published every quarter, and a big retailer like The Home Depot might open a couple of new stores every quarter, and perhaps close one. It’s slow and steady, but far more stable than the stock price.
If it’s a service stock (like Netflix), you might track the number of active customers. Even though Netflix’s stock has taken a hit lately, the number of active subscribers is still continuously growing.
Other stocks aren’t in fast growing industries (like Canadian National Railway). These stocks don’t grow fast, so they aren’t actively building new factories, or stores, or whatever. They compound mainly by buying back shares. Every quarter they buy back shares, and every quarter that remaining number of shares outstanding gets reduced. Thoughtful investors can track a steady decline in share count by looking at the shares outstanding. That declining share count means every quarter the investor owns a larger and larger piece of the business.
Other stocks pay-out a hefty (and growing) dividend stream. Some investors find it relaxing to ignore the share price, and watch the steady stream of dividends entering their account. This is a good reminder about knowing where your money comes from. Is it the market or is it the business?
While it can be difficult to hold stocks and other assets during declining markets, don’t think of these market movements as “losing money”. That’s a recipe for fear and sleepless nights. Instead, just think of those rising and falling movements as tidal fluctuations around the true value of your investments. Some times it’ll rise above the true value, other times it will fall below it. You aren’t actually losing any money.
Once you understand the true value of your investments, it becomes easy to ignore the fluctuations of the market. You’ll be able to see the rise in that “true value” regardless of what the market is doing on a given day.
To do this, it requires just a little more knowledge than your standard ‘clam investor’, but it really isn’t all that much extra work. Anyone can do it, and it’s worth it for those worry-free days when the market is plummeting.