It feels like just about everybody is ready to leave 2022 in the rear view mirror. That’s fair - financially, it wasn’t the most pleasant experience. But if we’re quick to bury it and pretend it never happened, we may fail to learn the valuable lessons it offered us.
In fractional collectible markets, from the end of the first quarter onward, lessons were served up hot with a side of searing pain. Bear markets have a way of teaching very rapidly in ways that bull markets simply can’t replicate. Market participants quickly come to understand illiquidity, investor sentiment, investor psychology, time horizons, bubbles, and - frankly - gravity.
All of those factors played a role in unraveling markets this year. The FOMO, short-term orientations, and euphoric sentiment that pushed many collectible markets to highs in 2021 contributed to their downfall in 2022. With rates pressed higher and monetary stimulus a relic of yesterday, financial reality re-introduced itself to markets of all kinds. Of course, speculative markets were no different, particularly those that had become so reliant on near-instant gratification. When that gratification stopped coming - when the proverbial music stopped - there was little traction for markets in decline. This was especially true of asset classes without a long-tenured, pure collecting base with experience holding their asset of choice through cycles.
Fractional itself, initially conceptualized to democratize long-term exposure to assets that - over the long term - provided HNW & UHNW individuals with attractive financial outcomes, became increasingly focused on short-term outcomes during the boom years. Ultimately, though fractional grew considerably in 2020 and 2021, market participants viewed the assets and the markets through an increasingly thick short-term lens. It’s no surprise then that liquidity constraints weighed on markets experiencing a pile-up at the exits. With few long-term thinkers interested in buying into the various headwinds and therefore fighting the Fed, the lack of an ability to exit in an orderly fashion meant plummeting prices. In many or most cases, those plummeting prices were well mirrored and justified by ex-fractional activity; in others, assets and categories were simply victims of market inefficiency and irreversible bearish forces.
These market conditions produced performance with limited nuance. Across markets and categories, the outcomes are mostly the same, though to differing magnitudes. There were very few places to hide, with select blue chips and categories with strong historical track records offering some degree of protection.
Perhaps unsurprisingly, it was the most speculative, fast-rising, and bubbly asset categories that led the way down. NFTs, Video Games, and Trading Cards enjoyed a fast and furious boom period, and gravity brought them down with the loudest thud in 2022. Chasing these high-flying, headline-garnering areas in 2021 led to immense pain in 2022, and there was no shortage of chasing. Perhaps there are reasons to believe these categories could see growth over the next decade, but when they rise as quickly as they did in 2021, much of that growth gets prematurely priced in. Perhaps prematurely is too soft a word.
But while the pain was greatest in those assets, it surely wasn’t confined to them. More established categories like Books, Cars, and Luxury all felt 2022’s sting. Really, every category save for Wine & Spirits was vulnerable to shock. Like we said, given the veritable slew of ingredients working against markets last year, nuance was limited.
That just 14% of assets generated positive performance in 2022 is evidence of the overwhelmingly bearish activity. In reality, only Wine & Spirits saw more than a quarter of assets advance; Sneakers would have likely seen more weakness were it not for the fact that so many assets were halted the last quarter of the year as they transition to Public. Diversification can quickly become “diworsification”, and given the pace with which a high volume of assets were brought to fractional markets in previous years, investors that skewed - consciously or not - towards quantity over quality paid the price. Scale - seemingly a requisite of the standalone business model to date - doesn’t necessarily align with positive investor outcomes.
While there are occasional signs of stabilization - take the relatively more muted December returns for example - intermissions from the year long slide were limited. Economic circumstance shows little signs of turning markedly positive in the short term, and rotation away from quantity towards higher-quality assets may continue to pressure the majority of assets. That rotation is also not interminable should high quality assets run sufficiently ahead of their ex-fractional counterparts.
As always, market participants are urged to choose opportunities for capital allocation with the utmost discretion and care, and importantly to rely on much more than recent momentum as evidence of investment merit. This great reset likely offers opportunities to allocate for the long term, and with markets no longer charging quite so fast in either direction, there's no reason to skip a thorough evaluation of merits.
Okay, now we can let 2022 rest and embrace optimism for a better 2023 ahead, but with a nod to 2022, let's not confuse optimism with naivete.
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