With Valentine’s Day just around the corner, stock bulls remain in love as the major indexes once again hit another new, all-time record high this week (Dow 20,269). Unfortunately, however, there are many other investors afraid of going through another 2008-2009-like break-up, so they remain single as they watch from the sidelines. In a recent post, I point out, as repeated record highs continue to be broken, the skeptics remain fearful of divorcing their cash. While it is indeed true that since the end of the 2016 presidential election, some investors are beginning to date stocks again, there are still wide swaths of conflicted observers very afraid of potential rejection.
As I’ve documented on numerous occasions, the skepticism is evident in the depressing long-term trends found in the weekly fund flows data and the disheartening record-low stock ownership statistics.
Long-Term Relationships
For some, casually dating can be fun and exciting. The same principle applies to short-term traders and speculators. In the short-run, the freedom to make free-wheeling, non-committal stock purchases can be exhilarating. Unfortunately, the fiscal and emotional costs of short-term dating/trading often outweigh the fleeting benefits.
How can you avoid the relationship blues? In short…focus on the long-term. Like any relationship, investing takes work, and there will always be highs, lows, and bumps in the road. It is better to think in terms of a marathon, rather than a sprint. The important lesson is to maintain a systematic, disciplined approach that you can apply irrespective of the changing investment environment. In other words, that means not loosely reacting (buying or selling) to presidential tweets of the day.
Famed investor Peter Lynch spoke about long-term stock fund investing in this manner
“If you invest in mutual funds and make mutual funds investment changes in less than 10 years…you’re really just ‘dating.’ Investing in mutual funds should be marital – for richer, for poorer, and so on; mutual fund decisions should be entered into soberly and advisedly and for the truly long term.”
No relationship survives without experiencing wild swings, and stocks are no exception. Establishing deep roots to your investments via intensive fundamental analysis provides stability, especially if you are managing your portfolio personally. Even if you are outsourcing your investment management to an advisor like Sidoxia Capital Management, it is still important to understand your advisor’s investment process and philosophy. That way, when the economic and political winds are blowing fiercely, you won’t overreact emotionally and see your gains fly away.
Investing legend Warren Buffett has discussed the importance of intensive research on long-term investment performance through his “20-Hole Punch Card” rule:
“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
Patience is a Virtue
In the instant gratification society we live in, patience is difficult to come by, and for many people ignoring the constant chatter of fear is challenging. Pundits spend every waking hour trying to explain each blip in the market, but in the short-run, prices often move up or down regardless of the daily headlines.
Explaining this randomness, Peter Lynch said the following:
“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of a company and the success of its stock. It pays to be patient, and to own successful companies.”
Long-term investing, like long-term relationships, is not a new concept. Investment time horizons have been shortening for decades, so talking about the long-term is generally considered heresy. Rather than casually dating your investments, perhaps you should commit to a long-term relationship and divorce your bad short-term centric habits. Now that sounds like a sweet Valentine’s Day kiss your investment portfolio would enjoy.
