We live in a world of immediate gratification. From entertainment to shopping to the markets . . . people want it done well, done cheap, and done right now! For entertainment and shopping, those requirements may be possible. For the markets . . . no way.
One of the problems investors have is something that may not be their fault. We have several news channels focusing 24/7 on the global markets. We have the world wide web, Twitter, and other formats where information and news is constant. We have major brokerages (Schwab, TD Ameritrade, Fidelity, Scottrade, etc.) that make millions on trading revenue. They call it DARTs (daily average revenue trades) in the industry. Despite knowing what is best for clients some of these brokerages spend millions and millions pushing active trading because it makes them a ton of money! We are inundated with short term this and short term that. Studies have been done and have proven that the psychology of most people is completely skewed short term, it’s called recency bias.
This short term thinking and psychology comes to a head when the market becomes volatile . . . exactly like we are experiencing now. People dump their stocks, buy or sell options, or change their entire methodology based on a 6 month or even 1 year time frame. It’s sad. Chasing what supposedly has worked in the recent past (last 6 – 12 mos.) looking for the new flavor of the day. I will tell you that it will not build wealth . . . it will destroy it.
So what should an investor do during volatile times. Here’s four things.
- Understand the true value of the investments that you are buying so you have confidence in your decision to buy or hold.
- Sell those businesses and investments where fundamentals have changed and the value (see #1) of the company has eroded and it’s not worth holding any more.
- Utilize options to reduce exposure and volatility.
The fourth and final thing is arguably the most important to creating wealth. It’s so important but so hard for people to do that I bet most people reading this won’t do it. It’s the concept of using market volatility to purchase those investments that you want to own over the next 3 plus years.
It’s what the greatest investors, my investing heroes do . . . like Warren Buffett, Sir John Templeton, and Howard Marks. In fact let’s use Buffett and Marks own quotes to explain how to treat markets like we have now.
Warren Buffett from a 1997 Berkshire letter to shareholders:
“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have increased for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Now from Howard Marks:
“When everyone believes something is risky, their unwillingness to buy usually reduces it’s price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing since optimism has been driven out of it’s price.”
To put this in a different way, here’s what I would love to hear from our clients: “Brett or Brian, I can see the global market is down and there are several American and Global business on sale. What should I buy now that will be worth a lot more in the next 3, 5, 20 years?”
Can you imagine if the majority of investors thought like this . . like Buffett, Sir John Templeton or Howard Marks? Certainly it would create more wealth for those that did.
In summary . . . please, please, please don’t let this short term volatility derail a 5, 10, 15 plus year plan. Unless you need the money in the next 2 years, use this market as an opportunity to build your wealth over the next 5, 10, 15 years. (Remember, with the medical advances people will probably live a lot longer than you think you will . . . so adjust your time horizon’s in the proper way!)
Successful, smart investing to you.