Why Anyone Can Look Like a Stock Market Genius -- and How to Actually Be One

On March 23, 2020, almost exactly two years ago, the U.S. stock market reached its lowest point of the COVID-19 pandemic-induced plunge. It was less than three months into the year. But already the S&P 500 was down more than 30% year to date.

Since then, the market has staged an epic rally even when factoring in 2022's sell-off. The period from March 2020 to March 2022 has arguably been the most unique two-year performance in stock market history, as seemingly every kind of investing style and stock market sector has had its moment in the spotlight -- even if only for a matter of months. From meme stocks, to hypergrowth stocks, to stodgy value stocks. From large-cap giants to small-cap up-and-comers. And from technology and consumer discretionary to energy and financial stocks.

Over the short term, terrible strategies sometimes work amazingly well, while methodical calculations can lose money. Put another way, anyone can look like a genius for a while. However, the investors with the best long-term track records don't dip in and out of what's working or not working. Rather, they stick to their processes and put in the work, letting time work in their favor.

Here's what separates lucky trades from legendary investors, and what the last two years can teach us about human nature and the stock market.

Image source: Getty Images.

2020's winners and losers

Between 2019 and 2021, the U.S. stock market doubled. Despite 2020's plunge, the S&P 500 finished the year with an 18.4% total return then followed that performance with a 28.7% total return in 2021. 

In 2020, the spotlight shone brightest on hypergrowth stocks, cryptocurrency, pandemic winners like Peloton Interactive and Zoom Video Communications, and renewable energy. Meanwhile, oil and gas stocks tumbled; value was underperforming growth; and the tech-fueled Nasdaq-100 was crushing the S&P 500.

^SPX data by YCharts

2021's winners and losers

The overall market did even better in 2021. But it was led higher by a different cohort of winners. Meme stocks like GameStop and AMC Entertainment and special-purpose acquisition companies (SPACs) soared, with most hitting their highest levels in February 2021.

Meanwhile, Bitcoin and Ethereum continued to crush the market after rebounding from a brutal sell-off over the summer. The same pandemic winners that had led the market in 2020 were now selling off big time. Zoom and Peloton, for example, went from market outperformers (stocks expected to yield better returns than the overall stock market) to severe underperformers (stocks whose returns are worse than the overall stock market). What's more, the energy sector, which had been the worst-performing sector in 2020, was the single best-performing sector in the S&P 500 in 2021, while most renewable energy stocks finished the year down. Profitable large-cap tech stocks like Apple and Microsoft continued to gain and lead the market higher, helping the Nasdaq Composite beat the S&P 500 despite the underperformance from smaller tech stocks.

^SPX data by YCharts

2022's winners and losers

In 2022, low oil and gas supply paired with much higher demand is resulting in a sustained boom in oil and gas stocks. The broader markets remain down for the year. But interestingly enough, the Vanguard Value ETF is actually up for the year, while the Vanguard Growth ETF is down over 12% as investors shift away from Cathie Wood-style growth stocks toward Warren Buffett-like value stocks. Meanwhile, crypto has sold off; meme stocks are still down big off their highs; and pandemic winners keep falling too as rising interest rates paired with valuation concerns continue to pressure unprofitable growth stocks. Renewable energy continues to underperform oil and gas.

^SPX data by YCharts

Adding it all up

It's worth mentioning that the conclusions we are drawing involve categorizing companies, so of course, some individual securities will be performing differently from their respective industries. But in general, the below table summarizes how each of the discussed categories performed in 2020, 2021, and so far this year.

A fine line between brilliance and underperformance

Virtually every investing style, from moonshot big bets to deep value, has performed extremely well at some point between 2020 and today. And for that reason, it's been easy for folks to criticize certain strategies or praise others, only to reverse their opinion just a few months later.

Recency bias, which is asserting greater importance over recent events than older events, is a powerful force. It can often cloud our judgment and lead to bad decisions. For example, Cathie Wood's flagship ARK Innovation ETF (ARKK 2.98%) returned a staggering 213% between Jan. 1, 2020 and its peak on Feb. 12, 2021, while Warren Buffett's Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) produced a paltry 7.5% total return. However, between Feb. 12, 2021 and March 24, 2022, Berkshire Hathaway stock has gained a market-beating 43%, while the ARK Innovation ETF has lost 58% of its value. 

This isn't to say that Wood is wrong, and Buffett is right. It's merely to show that for a 13-month period, Cathie Wood looked like a genius, while Buffett looked bad, and then over the next 13-month period, Wood looked bad, while Buffett looked like a genius.

Focus on the big picture

Between 1965 and 2021, Berkshire Hathaway's compounded annual gain was an impressive 20.1% compared to 10.5% for the S&P 500 (including dividends). By every measure imaginable, Warren Buffett is a great investor and arguably the greatest investor of all time. Despite being down big from its high, the Ark Innovation ETF has produced a total return of 261% since its inception. Over the same time period, the Nasdaq Composite has produced a 235% total return and the S&P 500 has produced a 162% total return. So Cathie Wood's long-term track record also suggests that she is a great investor too. 

The lesson here is that it's better to judge a company, an investor, or an asset based on its long-term performance and where it's headed from here, not on how it's doing over a short-term time period. Every strategy has its time in the sun. Right now, value stocks and oil and gas look like the hottest thing in town, while growth companies look rather silly for reaching lofty valuations based on negative earnings. Yet not long ago, the narrative was flipped. And one day, it will probably flip once again.

Respecting the power of recency bias and how it can affect your decision-making skills, and the decision-making skills of the market, in general, will help you filter out the noise and stay on track to reach your financial goals.