As we’ve hit the halftime mark for the investment year 2022, we are faced with a daunting two-headed monster. One head is the first full year of unwinding what Charlie Munger called, “the biggest financial euphoria episode in his career, because of the totality of it.” The second head is what we call “wolverine inflation,” which is mean and leaves a stench. This combination is powerful and, in many ways, unprecedented. How do we navigate a stock market which is dealing with a two-headed monster?

John Kenneth Galbraith, in his book, A Short History of Financial Euphoria, explained today’s circumstances quite well:

“That the free enterprise economy is given to recurrent episodes of speculation will be agreed. These---great events and small, involving bank notes, securities, real estate, art and other assets and objects---are, over the years and centuries, part of history.”

Munger, who has seen 75 years of these episodes, is looking at the last five years realizing that what happened to tech stock valuations became a financial euphoria episode. As a result of five consecutive years of record performance among the largest of the large-cap stocks, a mania developed among research analysts, portfolio managers and individual investors, believing that these FAANG stocks were a ticket to countless wealth. Investors, both institutional and individual, were trained like Pavlov’s dog in a “just buy the dips” mentality.

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