A good bad year

For investors, 2022 was the best bad year that I remember in a long time. On the face of it, the markets should have crashed. If I list the actual events of the year, from a major European war that now seems never-ending, an oilprice spike, yet another piece of COVID idiocy from the Chinese government and, above all, the longfeared end of the free-money regime of the US, then investors should have had a very bad time indeed. And yet, here we are, the year has ended and we're fine. Compared to how bad such a year could have been, it's been a good year.

- Dhirendra Kumar

There's a fuller treatment of 2022 in our cover story of the month, but there's one more sense in which I can call this the best bad year I remember. Those investments that should have done badly actually did badly. That sounds like a cruel thing to say but this is important. The function of any properly functioning, free-market investments system is not just to ensure that good investments succeed and bring good returns to their investors but also that bad investments fail and cause losses to their investors.

You read that right - the failure of bad investments is just as important as the success of good ones, perhaps even more important. As long as badly run and lossmaking businesses stay afloat, they keep sucking up resources that good businesses could use. Here I mean resources in the broadest sense, which include investors' funds, employees, market share and the general bandwidth of attention. The sooner bad businesses fail and release all these, the better it is for those of us who have invested in the good ones.

Unconvinced? As proof, I'll just point out that the industry with the highest mortality rate of businesses over the last two-three decades is technology and yet that's also the industry that has had some of the biggest successes and has transformed our world. One of the contributory reasons is that dysfunctional businesses failed quickly and got out of the way. That is, up to a point.