If you are like most investors, when you power up your computer and open your email to start the day, you are flooded with trade ideas and suggestions.
You will get ‘trades of the day’ and ‘can’t miss short-term opportunities’ that you need to take advantage. If you watch the popular financial news networks as you get ready for the day, every couple of minutes someone comes on the screen suggesting you buy ‘this stock’ to take advantage of some developing trend or ‘that option’ to benefit from a significant impending development. Throughout the day you will hear from friends, co-workers, brokers and others who have strategies and suggestion you need to implement right now.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
The truth is that if you are approaching the markets correctly, most of the time you should be ignoring that advice. If you buy stocks correctly, the money is going to be made in sitting still and doing nothing.
The great investors from John Templeton to Warren Buffett have made the bulk of their money by buying stocks in bad markets when they are available at attractive valuations, and holding them until the market reaches excessive levels. In between these times, they did little to nothing but collect dividends and watch their stock go up in value.
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The hard part is buying them correctly
It’s not easy to be a buyer of stocks in a bad market. The media is talking of crash corrections and dark days ahead. Most of the people you know have taken their losses, gone to cash and vowed to never buy stocks again. When you do screw up your courage and buy a stock, it usually keeps going down for a while after you buy. For a period of time you are very much alone and seeing losses on your stock picks almost every day. It is not a comfortable experience most of the time.
To be a buyer in a bad market you have to be sure of the asset value and earnings power of the companies you are buying. If you are buying shares of good companies at great prices, you can be confident that the eventual recovery will lift the share back to a more reasonable valuation and, eventually, even an extravagant valuation when the happy days are here again.
When to sell
It’s also difficult to be a seller when the market is going through a euphoric phase. Everybody else is buying and telling stories of the great stocks and wonderful ideas they have for making money in the market.
Your nephew, the gas station attendant, is talking about buying a Porsche with his day-trading profits. Your mom is cashing in CDs at the bank to take advantage of the Facebook thing everyone is talking about these days. Everyone but you is buying with both hands. It can be lonely and frustrating, but again, your conviction that the shares are fairly valued and then some will help you take your profits.
Doing nothing can be hard
As hard as buying greed and selling fear can be, it is the times in between that are the most difficult for most of us. The markets are open every day and there is a feeling that to be real investors we should be doing something. Every day people are talking about things like selling covered calls and trading around their positions. The gurus and pundits are fine tuning their portfolios and rotating among sectors to get the very best results.
There is something “big” going on just about every day in the markets with new economic and earnings reports creating what we are told are trading opportunities — shouldn’t we be doing something?
There is a constant swirl of news, events and opinions that we feel we should be reacting to so as to maximize our profits. The markets are open and other people are trading in and out of stocks on a regular basis. We hear about companies that are much more exciting than the boring little banks and industrial companies in our portfolio.
You may have a portfolio of stocks that were purchased in a bad market at fractions of their asset value and earnings power just sitting still. Waiting for the value to be recognized by the market over time is going to make you far more money than trading around your positions or trying to chase the hot sectors and stocks at a given moment in time.
Doing nothing isn’t easy. But it is profitable.