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Invariant Q4 2022 Letter

Happy New Year!

We hope you and yours had an enjoyable holiday season. We wish the end of 2022 meant the end of challenging times for investors. While there are compelling opportunities out there across markets, we suspect the environment will remain tricky in 2023.

Executive Summary

• 2022 was a uniquely difficult year for investors, as the bear market in stocks was amplified, instead of offset, by the sharply negative performance in fixed income.

• The investment world is undergoing one of the most significant transitions since the end of World War II. War-like fiscal spending by governments during COVID, combined with massive supply chain disruptions and a surge in demand for consumer goods, unleashed global inflation at rates not seen in decades.

• In response, the Federal Reserve raised interest rates at a historic pace, ending the environment of stable nominal growth, low inflation, and persistently declining interest rates investors had grown accustomed to since the 2008 financial crisis. Most market participants were skeptical about the Fed’s actions every step of the way last year. These participants are now slow to fully appreciate the implications. We are in a new financial world.

• 2023 will involve continuing to navigate the Fed, a potential recession, volatile inflation, geopolitical developments, and corporate earnings that have been resilient but are vulnerable to macroeconomic conditions.

• There are significant opportunities in stocks, bonds, and commodities, irrespective of where the averages end up at year end. The immense dispersion in returns we saw in 2022 is likely to continue. Investors employing a disciplined, data-driven investment process, will have an opportunity to cut through the noise and take advantage of this new regime.

2022 Recap

Investors had very few places to hide in 2022. The S&P 500 was down 18.17%, and the often-reliable diversifier, bonds, were down 13.03% (as measured by the iShares Core US Aggregate Bond Index ETF, AGG). Long-term treasuries, the place many rules-based asset allocation strategies look to hedge stock market declines, were down 31.24%. A naive 60/40 portfolio combining SPY and AGG was down over 16%, one of its worst years in history.

Focus on Tech Stocks

In many places, it was far worse. Tech stocks, the darlings of Wall Street, were down 32.58% (QQQ Nasdaq-100 ETF).

Household name names like Amazon, Tesla, and META were down over 50%. Meanwhile, the “biggest loser” list is filled with speculative growth stocks popular with newbie traders that featured prominently on CNBC back in 2020 and 2021: Carvana, Upstart, Affirm, Coinbase, Wayfair, Rivian, Roku, and Twilio. All of these stocks were down between 80-98%. This carnage has led to permanent loss of capital for many investors.

Buy the Dip?

Does this mean it is a good time to be a contrarian and buy these names? Invariant’s position is that growth stocks were in a bubble that peaked as early as February 2021, and we are only in the middle innings of the unwind, especially regarding relative returns.

Like the 2000 tech bust, the behavioral trap many investors will fall victim to is to continue to buy the dip in stocks that remain historically overvalued in the hopes that they will reclaim their past glory. In reality, many are on an inevitable march to years of underperformance, and in some cases, bankruptcy.

I have dozens of anecdotes of friends and professional investor associates who continue to plow money into these stocks. Most of them are sitting on 30-50%+ losses on their initial investments, despite at one point having significant unrealized gains. And that's to say nothing of crypto...

Let’s look at the data - Cathie Wood’s ARK Innovation ETF (ARKK) is a poster child of the recent bubble. At one point, it was taking in more investor money than Blackrock and Vanguard combined. ARKK has not only completely round-tripped its 2020 COVID gains, but it is now down 36% since the start of 2020 and underperforming the S&P 500 by 57.93% since inception.

Despite being down 67% in 2022, ARKK took in net investor flows of over $1 billion dollars. Historically, these unwinds don’t stop until years after there is abject capitulation by investors, which we have not begun to see. While it is likely there will be periods like last summer when many of these stocks experienced breathtaking rallies, we believe for many of them (and for the relative return prospects of the sector in general), their fate is sealed.

Opportunities Abound

While you may come away from the previous section thinking Invariant is uniformly bearish about 2023, that is not the case. If you aren't looking for opportunity after the largest drawdown of financial asset wealth in history, you need to find another line of work.

Volatility breeds opportunity, and there are several parts of the market Invariant is excited about. This isn't the first time a certain sector caught the fancy of the investing public, grew into a mania, and crashed back down to reality. In many of these other examples, there were opportunities to make money in different stocks or with a different investing style. If you waited for the "all clear" from the economy or indexes, you missed out.

For example, as one of the greatest manias in living memory unwound, there were parts of the stock market that generated significant relative and absolute returns. From the peak in 2000 through late 2003, mid-cap value stocks generated over 40%, outperforming the S&P 500 by 71% and the Nasdaq Composite by nearly 100%. There is certainly some credence to the old saying, "It is a market of stocks, not a stock market."


Value investing is an approach that seeks to invest in companies that appear underpriced by some means of fundamental analysis. This analysis takes many different forms. Some value investors perform deep, bottoms-up research, and others rely primarily on quantitative screens to identify inexpensive companies as measured by ratios like price/earnings, price/book value, or price/free cash flow.

Value investing had been under significant pressure relative to growth stock investing in the decade+ since the financial crisis, particularly in the five years through 2021. There are many potential reasons for this, such as the role interest rates play in how investors value earnings now versus in the future. If rates are low, investors are thought to value future growth more, and if rates are high, that growth gets discounted more heavily, leading to a preference for companies currently generating profits.

This came to a parabolic crescendo in the immediate aftermath of COVID, and this underperformance was the final nail in the coffin for many value investors whose clients could no longer tolerate watching their friends and neighbors getting rich without them.

However, markets have a way of making it nearly impossible to be properly positioned for cyclical turns.

Value investing came back with a vengeance in 2022. While the Vanguard Growth ETF was down 33.15%, the Vanguard Value ETF was nearly unchanged at -2.07%. The gap in cumulative total returns from the beginning of 2017 through the end of 2021 was 122.14%. Extend that period to the end of last year, and the difference has narrowed to 25.66%.

A Google search for "growth versus value stocks" will turn up a vigorous debate, with both sides arguing for the primacy of their approach. While the debate is interesting and captures the essence of some important underlying market dynamics, we believe it is reductionist. There is tremendous variation within each approach, and the underlying drivers of each factor change over time.

However, we do have an opinion. There is a time and a place for both styles. Relative returns between the two tend to move in prolonged cycles, and now it is likely value's turn:

We are attempting to capitalize on this in a number of ways across our portfolios.

1. Incorporating equal-weight index ETF's as opposed to the industry standard capitalization-weighted ETF's:

2. Profitability Alpha, Invariant's flagship single-stock portfolio, is a profitability factor strategy with a value overlay:

3. Core holdings in best-of-breed ETF's from managers whose philosophies around value align with our own:

Invariant Business Recap and Moving Forward

While many asset managers found themselves paralyzed by the market volatility, Invariant is grateful to have had one of its most productive years ever. We:

• Successfully changed our primary custodian from Schwab to LPL.

• Invested heavily in the client experience by adding Orion, the premier financial planning and client portal software in the industry.

• Published two dozen blog posts, ranging from sophisticated financial planning topics to market and economic updates, and deep dives into our investment process.

• Welcomed a new team member, Erin Fischer, who is doing an excellent job building out Invariant’s concierge service offering.

• Welcomed several new clients and grew our assets under management during a big down year in markets. Our presence continues to grow in South Florida, and we look forward to announcing another new team member later this year.

While many of our core views are higher time frame and not subject to short-term developments, there are several key variables on our radar as we begin 2023.

1. The Fed: A pause in rate hikes appears to be coming, as the Fed Funds rate has now eclipsed the two-year yield, and inflation is poised to slow significantly:

2. The Economy: According to the Philly Fed, a record 43% of professional forecasters now expect a recession in the coming year. Yield curves are inverted, consumer and business confidence readings are at extreme lows, and manufacturing PMI’s are in contraction.

However, as has been the case in several important ways throughout and in the aftermath of COVID, there are perplexing elements to the situation.

Although we know employment is a lagging indicator, it should have weakened materially by now. “Hard” economic data is also stubbornly strong, and the gap between it and survey-based “soft” data is at a record wide. The Atlanta Fed GDPNow estimate for Q4 released this week sits at +3.9%.

For a good thread to open your mind to the possibility that those professional forecasters may end up being wrong, or at least early, see here:

3. Private Markets: The Fed just raised rates from 0% to 4.5% twice as fast as it did in the mid 2000’s. Hundreds of billions of dollars, and likely more, are in investment strategies dependent on stable or declining interest rates either explicitly (via the refinancing channel), or implicitly (via assumed multiple expansion).

As we wrote about the Blackstone situation, the gap between public and private market valuations is likely to close, although this dynamic could take some time to play out.


While we remain open minded about how 2023 will play out for the economy and risk assets in general, we are excited about the opportunities we see in certain parts of the stock market and across asset classes.

There are seismic shifts taking place across the investment world, and Invariant is well prepared to navigate them. If you can think of anyone who might benefit from our insights and services, please forward them this letter and encourage them to reach out.

We look forward to the opportunity to continue protecting and growing the product of your life’s work.

Thank you for your trust and confidence.

David M. Borowsky

Chief Investment Officer


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