“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” ~ Burton G. Malkiel, Professor of Economics, Emeritus, Princeton University
Category Archives: Investing
U.S. Housing Market
Updated: July 22, 2022
Home sellers are contending with apprehensive buyers amid rising mortgage rates and the possibility of an oncoming recession. RedFin
Single family home sales in June showed the first signs of leveling off after steady monthly increases for more than a year, according to the Jacksonville Daily Record. Although, sellers still were receiving slightly above 100% of asking price in June in certain housing markets, the general trend is mixed nationwide.
Price drops have become a common feature of the cooling housing market, particularly in places that were popular with homebuyers earlier in the pandemic, writes Dana Anderson, a data journalist at Redfin. Nearly two-thirds (61.5%) of homes for sale in Boise, ID, had a price drop in June, the highest share of the 97 metros in RedFin’s analysis. Next came Denver (55.1%) and Salt Lake City (51.6%), each metros where more than half of for-sale homes had a price drop.
Home prices rise in June
In June 2022, home prices were up 11.2% compared to last year, selling for a median price of $428,379, according to Redfin.
On average, the number of homes sold was down 17.4% year over year and there were 609,147 homes sold in June this year, down 737,598 homes sold in June last year. The national average 30 year fixed rate mortgage rate is at 5.5% and is up 2.5 points year over year.
While also in June 2022, the number of homes for sale was 1,647,846, up 1.6% year over year.
The number of newly listed homes was 782,083 and down 4.4% year over year. The median days on the market was 18 days, up from 3 year over year. The average months of supply is 18 months, up from 3 year over year.
Additionally, 55.5% of homes sold lower list price, down 0.86 points year over year. There were only 17.9% of homes that had price drops, up from 9.0% of homes in June last year. There was a 102.3% sale-to-list price, down 0.24 points year over year.
Prices keep dropping amid a cooling housing market, particularly in places that were popular earlier in the pandemic. #realestate
See our full ranking 👉 https://t.co/JixvgcxY2w pic.twitter.com/CgA19PAOK7
— Redfin (@Redfin) July 18, 2022
Moreover, inflation and higher mortgage rates have slowed sales and priced out of the housing market many potential home buyers. As a result, the inventory of homes are beginning to pile up on the market and prices are slowly falling nationwide.
Takeaway…the once red hot U.S. housing market is showing signs of cooling and housing prices are contracting. Instead of over eager buyers and multiple offers on listed homes for sale, buyers are canceling sales contracts in increasing numbers and walking away from earnest money. And, what was unthinkable just a year ago, home sellers and builders are cutting home prices to entice potential home buyers and close sales.
For sellers, there is still money to be made in the housing market, but asking prices need to be very attractive to home buyers.
References:
- https://www.redfin.com/us-housing-market
- Dana Anderson, More than 60% of Boise Home Sellers Dropped Their Asking Price in June Amid Cooling Market, Redfin.com, July 14, 2022. https://www.redfin.com/news/price-drops-cooling-market-june-2022/
- Dan MacDonald, Northeast Florida home prices dip after months of increases, Jacksonville Daily Record, July 22, 2022, pg. 4. https://www.jaxdailyrecord.com/article/northeast-florida-home-prices-dip-after-months-of-increases
Price to Earnings (P/E) Ratio
Price is what you pay. Value is what you get.
The price-to-earnings ratio, or P/E ratio, helps investors compare the price of a company’s stock to the earnings the company generates. The P/E ratio helps investors determine whether a stock is overvalued or undervalued.
By comparing the P/E ratios companies in the same industry, investors can determine which companies are relatively under or over valued in comparison to their industrial peers.
The P/E ratio is derived by dividing the market price of a stock by the stock’s earnings.
The market price of a stock tells you how much people are willing to pay to own the shares, but the P/E ratio tells you whether the price accurately reflects the company’s earnings potential, or it’s value over time.
If the P/E ratio is much higher than comparable companies, investors may end up paying more for every dollar of earnings.
The typical value investor search for companies with lower than average P/E ratios with the expectation that either the earnings will increase or the valuation will increase, which will cause the stock price to rise.
On occasion, a high P/E ratio can indicate the market is pricing in greater growth that’s expected in the future years.
A negative P/E ratio shows that a company has not reported profits, something that is not uncommon for new, early stage companies or companies undergoing financial perturbations.
Current stock price may be important in choosing a stock, but it shouldn’t be the only factor. A low market stock price does not necessarily correlate to a undervalued or cheap stock.
The P/E ratio is a key tool to help you compare the valuations of individual stocks or entire stock indexes, such as the S&P 500.
References:
- Rajcevic, Eddie, Greenbacks & Green Energy, Luckbox, May 2022, pg. 58.
- https://www.forbes.com/advisor/investing/what-is-pe-price-earnings-ratio/
The War on Fossil Fuels
“Solar and wind power aren’t reliable sources of energy, simply because there are nights, clouds and windless days.” Bjorn Lomborg
“The developed world’s response to the global energy crisis has put its hypocritical attitude toward fossil fuels on display,” writes Bjorn Lomborg. Wealthy countries continue to admonish developing ones to cut their fossil fuels consumption and increase their use renewable energy, he states.
Last month the Group of Seven went so far as to announce they would no longer fund fossil-fuel development abroad.
Meanwhile, in response to the current energy supply constraints, Europe and the U.S. are begging Arab nations, specifically Saudi Arabia, to expand crude oil production. Germany is reopening coal power plants, and Spain and Italy are spending big on African gas production.
Over the past century, the developed world became economically wealthy through the pervasive use fossil fuels, which still overwhelmingly powers most of their economies. Fossil fuels still provide three fourths of wealthy countries’ energy consumption, while solar and wind provide less than 3% combined.
The reality is that solar and wind power aren’t reliable sources of energy, simply because there are nights, clouds and windless days. And, improving battery storage won’t help much: There are currently enough battery storage in the world today only to power global average electricity consumption for 75 seconds. By 2040, the battery storage capacity would cover less than 11 minutes of average global consumption.
The assault on fossil fuels has shrunk U.S. refining capacity and the refinery shortage is driving up fuel prices. Basic economics should inform politicians that “prices rise when supply doesn’t meet demand”.
With oil and gas prices on the New York Mercantile Exchange are at five-year highs, you would expect that it would be in oil and natural-gas companies interest to ramp up production, given the current high prices,.
But, oil and gas companies expect that as soon as the current energy turmoil subsides, the Biden administration will shift back to hostile rhetoric, anti-energy legislative proposals, and oppositional regulatory policies.
By forcing up the price of fossil fuels, policymakers have put the proverbial cart in front of the horse. Instead of driving up fossil fuel prices higher, policymakers need to make green energy much cheaper and more effective.
Humanity has relied on innovation and technological breakthroughs to solve other big challenges. We didn’t solve air pollution by forcing everyone to stop driving but by inventing the catalytic converter that drastically lowers pollution.
References:
- https://www.wsj.com/amp/articles/the-rich-worlds-climate-hypocrisy-energy-fossil-fuel-wind-solar-panel-india-poverty-power-battery-storage-11655654331
- https://www.wsj.com/amp/articles/is-6-a-gallon-gasoline-next-gas-prices-refining-shortage-fossil-fuels-11654806637
- https://www.wsj.com/amp/articles/why-energy-companies-wont-produce-oil-natural-gas-biden-administration-fossil-fuel-inflation-prices-11654720932
- https://nypost.com/2022/06/19/fossil-fuel-price-spikes-are-causing-pain-but-little-climate-payoff/
Ten Critical Investing Lessons
Investing in assets is a great way to grow your money or to put your capital to work.
If there’s any lessons investors relearned in 2022, when investing in stocks, bonds, derivatives and real estate, it’s that the markets will be unpredictable, defy logic and offer unexpected surprises.
Sometimes investors can correctly anticipate what’s coming based on our past investing experience and macro economic information. Other times, investors are reminded no matter what they thought they knew, the market always knows better.
For these reasons, it’s important to remember you can always become a better, more patient and disciplined investor, whether you’re learning lessons the hard way, reminded of lessons you previously learned, but forgot, or learning from the good or bad experiences of others.
Here are 10 Critical investing lessons you wish you could teach your younger, novice self:
1) Personal finances first – Master and manage your personal finances first and foremost. Dealing with volatility is never easy, but it’s so much easier when your personal finances are rock-solid (no bad or debilitating debt, positive cash flow and net worth, emergency fund established). Know and strengthen your personal balance and cash flow statements. And, always have some cash on hand to take advantage of market dips and pullbacks.
2) Expect to be wrong often when investing – You’re going to be wrong when investing. You’re going to be wrong a lot. Your goal isn’t to bat 1.000 (that’s impossible). Your goal is to increase your odds of success. Even the best investors are wrong approximately 2 out of 5 times.
3) Sell slow – Don’t be in a rush to sell – It’s tempting to book a profit quickly or sell when you get scared. One investor sold MSFT at $24. Current price: $268. Selling a mega-winner early is the most expensive investing mistake you can or will make. And, don’t forget about taxes when you earn income or sell assets. Any income (or profit) you earn from selling assets is taxable. Before you sell any appreciated asset or take any income, make sure you have enough money for the taxes so that your gains will not be wiped out by taxes alone.
4) Watch the business – Watch the business, not the stock. The two are not linked at all in the short-term. But are 100% linked in the long-term. Always remember, you’re buying a piece of a business, do understand the business and how that business generates cash flow.
5) Buy quality – Capital is precious. Making money and putting money to work for you are hard. Saving it and growing it are harder. Buy the highest-quality investments you can find. Avoid everything else. When you focus on buying quality, opportunities can be found in any market whether it be up (bull) or down (bear). Thus, stick to your long-term plan of buying quality companies every month and forget about how everybody else is performing.
6) Add to winners, not losers – Add more capital to your winners, not your losers. “Winners” means the business is executing. “Losers” means the business isn’t. Add to the best companies you can find at better and better value points.
7) Patience above all – Your biggest edge and investing super power is patience. Don’t waste it. Compounding over the long term is the greatest power of investing. Your holding period for an investment asset should be measured is in decades, not days.
8) Do nothing is usually correct – “Do nothing” (being a long term investor) sounds easy, until you start investing your capital. Investing should be more like watching paint dry than a Las Vegas casino. More often than not, it’s the correct thing to do. Ninety-nine percent of good investing is doing nothing. It’s essential to ignore the noise and the hysteria of Mr. Market. Never Let Short-Term Volatility Dictate Your Long-Term Investment Decisions.
9) Learn valuation – Know what valuation metrics matter and when they matter. P/E Ratio is great, but it’s not universally applicable, and it only works when a company is in mature (stage 4). Consider ROIC, P/FCF, and P/Sales. Remember: Every investment is the present value of all future cash flow.
10) Network with others – Connect with other trusted long-term investors and experts. A good community is worth its weight in gold. Especially when bear markets appear.
Final thought: Have a plan – A financial plan is paramount to your financial success. During periods of volatility, you often hear that investors should “stay the course”, but there is not a course to stay without having a comprehensive financial plan.
The plan should be based upon your goals, values, purpose and dreams for the future, short and long term. It is a roadmap for your financial future and it should provide a guide for how you invest. The plan should also address other areas such as retirement planning, estate planning, risk management, asset allocation review, and cash flow planning.
In all things, be grateful! Appreciate and be grateful for all aspects for your current life and the abundance of opportunities. Gratitude influences your state of mind, your behavior, your relationships and your perspective on the world.
Roman philosopher Cicero said that, “Gratitude is not only the greatest of the virtues but the parent of all the others.”
Source: Brian Feroldi, 10 Critical Investing Lessons, Twitter, June 25, 2022.
Warren Buffett’s Three Investing Principles
If you want to invest on your own, billionaire investor Warren Buffett recommends three investing principles that have guided him over the decades.
The principles are derived from a book first published in 1949: “The Intelligent Investor”, written by Buffett’s mentor, Benjamin Graham:
Principle 1: Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.
Buffett has four things he wants to see, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock:
- “One that we can understand …” When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future. He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them.
- “With favorable long-term prospects …” Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.” A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
- “Operated by honest and competent people …”. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something. And it’s just a lot easier to operate with people that are candid. “And we like people who are smart, you know. I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING. The quality of the business itself, however, takes precedence.
- “Available at a very attractive price.”Buffett’s goal is to buy when the price is below a company’s “intrinsic value.”“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.“And we’re not perfect at estimating that, obviously”, Buffett stated. “But that’s what an investment or a business is all about. You put money in, and you take money out.”
Principle 2: The stock market is there to serve you, not instruct you.
Many non-professional investors become concerned when stock prices fall. They think the market is telling them they made a mistake. Some may even be so shaken that they sell stocks at the lower prices.
Buffett takes the opposite view. If he buys a stock because he thinks the company will be a long-term winner, he doesn’t let the market convince him otherwise.
Principle 3: Maintain a margin of safety
“We try not to do anything difficult …
“This is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.
“That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly.
“So, we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.” — 1998 BERKSHIRE ANNUAL MEETING
Low cost index funds
Buffett has long recommended that investors put their money in low-cost index funds, which hold every stock in an index, making them automatically diversified. The S&P 500, for example, includes big-name companies like Apple, Coca-Cola and Amazon.
Buffett said that for people looking to build wealth and their retirement savings, diversified index funds make “the most sense practically all of the time.”
“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”
References:
Buying Stocks On the Dip
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” ~Warren Buffett
Billionaire investor Warren Buffett added shares of companies during the market downturn. He has been acquiring stocks on the dip during the recent quarter’s market downturn and bulking up his stakes in oil companies such as Occidental Petroleum (OXY)
Buying a ‘Wonderful Company at a Fair Price’
The most important concept to appreciate when buying stocks is that price is what you pay for a stock, and value is what you get. Paying too high a price can decimate returns and increase your investing risk.
To delve deeper, the value of a stock is relative to the number of earnings or cash flow the company will generate over its lifetime. In particular, this value is determined by discounting all future cash flows back to a present value, or intrinsic value.
Buffett has said that “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.
Buffett’s investing style has been buying stocks on sale priced below its intrinsic value. He has never been one that favors acquiring commodities, but higher inflation rates could have played a role, Thomas Hayes, chairman of Great Hill Capital in New York, commented.
“As for Buffett buying shares in OXY, I wouldn’t make too much on it,” Hayes said. “Historically, he has avoided investing in commodity stocks. Today he sees it as a hedge against inflation and a potential supply/demand imbalance.”
Inflation is the biggest strain on the economy. While the pace of inflation eased slightly during the month of April, investor sentiment towards the Fed’s pace of tightening remains mixed.
The fact that he is deploying his war chest of cash is a strong indication that he and his lieutenants believe that there are undervalued stocks out there,” he said. “This doesn’t mean he believes that the market is undervalued or will rebound in the near future, but that some companies are compelling buys. This is a good signal for value investors.”
Buffett’s energy investments demonstrate the 91-year old’s investing strategy of acquiring shares in companies that have low valuations and shareholder returns in the form of dividends and buybacks, Art Hogan, chief market strategist B Riley Financial, told TheStreet.
References:
Investing 101: Building Long-Term Wealth
Managing your money and building wealth has to be a priority if you ever want to be in a better financial situation than you are today. Ramit Sethi
If you’re like most people, you probably think investing is something only people with a lot of money can do. But here’s the truth: anyone can invest and everyone should be investing.
Everyone with expendable monthly income should be investing. Even if you aren’t making major bucks and even if you are still paying your student loans, you should be investing. Investing is a great long-term wealth building option that yields major rewards if you’re patient and smart about your investments.
Despite what you see on TV and social media, you don’t need to be (or even have) a stockbroker to get in on investing. In fact, it’s easier than ever to go at it alone, thanks to platforms like Charles Schwab, E-Trade and Robinhood. These sites (and others) offer no or low fee options for individual investors to start building a portfolio. Even better, some also give you access to financial planners who can provide investing tips and help answer questions along your investment journey.
Ready to start investing. Below are six investing tips from Brian Baker, investing and retirement reporter at Bankrate.com.
1. Think about your investing goals. First, people new to investing should ask themselves one simple question before getting started: How soon are you looking to see a return on your money? Or, how soon will you need the money you’ve invested?
If the answer is sooner, like less than six months, then you should skip investing in stocks and instead put your cash in a money market mutual fund or high yield savings account. These options won’t offer as big of a return as investing, but you’ll see steady increases over time. More importantly, all of your money will remain relatively safe and still be there if you need it in a hurry.
On the other hand, if you don’t anticipate needing the money any time soon, then investing is a good option. Successful investing often requires a long-term approach and patience because the market can fluctuate. Over time, however, it often yields positive results for many investors.
Or, you can do both. You can put some of your expendable income in a money market mutual fund or high yield savings account and then use some for investing.
2. Consider how much you can afford to invest. If after you’ve paid all your bills and set aside some cash in a savings account, you still have money left over, great. You’re in the perfect position to start saving. While choosing how much to invest all depends on your personal expenses, investing 10% off your income is a great place to start if you’re able.
That last bit is important, though. Not everyone is able to invest 10%, and that’s okay. When you’re just starting out, invest only how much and when you’re able to. What you shouldn’t do is miss important bill payments or slack off on traditional savings just to put more toward your investments.
Another investing no-no? Prioritizing your investments over paying off your debts. This is especially true when you look at interest rates. While the money you invest may yield a 7-8% return, the interest rates on debt are often much higher than that. If that is the case with the debt you’re carrying, you should prioritize paying off your loans before putting lots of your money in the stock market.
3. Choose the right platform for you. Given the rise in popularity in investing, there are lots of different online brokerages and platforms for individual investors to choose from. Some of the most reputable and popular are Marcus Invest, SOFI, Acorns and Robinhood. Here are a few questions to ask when deciding which is best for you:
- Are there account minimums? Many of the online brokers available to individual investors who are new to investing don’t have any account minimums, so most people can easily get started with whatever amount of money they have saved.
- What are the account fees? You’ll want to find out if there are any fees associated with having an account with the specific online broker you’re interested in. Additionally, find out if they charge you for making trades or new investments. Platforms like Charles Schwab, E-Trade and Robinhood all offer commission-free trading.
- Do they offer fractional shares? Many of the brokerages are also now offering fractional shares, which are great if you don’t have enough money to buy a full share of a popular stock like Amazon or Alphabet.
- What investment research is available to you as a member? Chances are you’ll have questions as you begin investing. Some online brokers offer investment research to their members, which can be helpful when you’re just getting started.
- What else do they offer? Some brokerages offer other services like tax planning or access to financial advisors. Others offer different types of accounts like retirement that might be of interest.
4. Start with a diversified spread. Rather than trying to buy shares from specific companies that are buzzy right now, new investors should begin their journey with a more diversified spread. Focusing too much on individual companies often means you’ll need to have an in-depth knowledge of that company and its long-term strategy or plans. Most novice investors don’t have access to that kind of information, nor the time required to acquire it. Thus, it’s better to start by putting your money toward an S&P 500 Index Fund. “That’s going to give you a diversified portfolio of U.S. stocks at a very low cost, and that can be purchased through a mutual fund or through an exchange-traded fund (ETF),” Baker explains.
5. Know when to check in on your investments. If you’re following the more traditional investment strategy above, where you’re putting some savings into a diversified portfolio each month, you really don’t need to check your portfolio every day or even every week. Because this is a long-term investing strategy, checking your brokerage accounts monthly is more than sufficient.
6. Steer clear of common investing mistakes. When you’re finally ready to start investing, it can feel exciting, like you’re finally getting in on the action. But don’t get ahead of yourself. Here are three of the worst things you can do when you first start investing.
- Don’t trade often. “Lots of trading activity is not the path to long-term investment success,” Baker says.
- Don’t obsessively check your account. “If you’ve made long-term investments, there’s really no need to check your portfolio every day,” Baker reiterates.
- Don’t get overly emotional. “Emotion is another enemy of investment success,” Baker says. “No one likes to see their portfolio decline, but stocks are inherently volatile, and it’s inevitable they will go down sometimes. People should keep their eye on their long-term goals,” he adds.
In conclusion, investing can be confusing if you don’t know where to start. Everyone’s circumstances are different, which means what’s right for you may not be right for someone else.
Take the time to evaluate your personal investing options and choose what works best for you. And research shows that investing is the best way to build long-term wealth and achieve your financial goals.
“Keep your eye on the [long term wealth building] goal, keep moving toward your target.” ~ T. Harv Eker, Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
References:
12 Timeless Rules of Investing
Guidelines Every Investor Should Embrace, But Few Actually Do
An Investment U White Paper Report written by Dr. Steve Sjuggerud, Advisory Panelist, Investment U
In the the white paper report, Dr. Sjuggerud identified 12 classic investing rules that every investor can use throughout their lifetimes.
These guidelines are provided to help investors achieve their goals, sometimes in capitalizing on gains and sometimes in mitigating losses.
1. An attempt at making a quick buck often leads to losing much of that buck.
- The people who suffer the worst losses are those who overreach.
- If the investment sounds too good to be true, it is.
- The best hot tip is “there is no such thing as a hot tip.”
2. Don’t let a small loss become large.
- Don’t keep losing money just to “prove you are right.”
- Never throw good money after bad (don’t buy more of a loser).
- When all you’re left with is hope, get out.
3. Cut your losers; let your winners ride.
- Avoid limited-upside, unlimited-downside investments.
- Don’t fall in love with your investment; it won’t fall in love with you.
4. A rising tide raises all ships, and vice versa. So assess the tide, not the ships.
- Fighting the prevailing “trend” is generally a recipe for disaster.
- Stocks will fall more than you think and rise higher than you can imagine.
- In the short run, values don’t matter. In the long run, valuations do matter.
5. When a stock hits a new high, it’s not time to sell something that is going right.
- When a stock hits a new low, it’s not time to buy something that is going wrong.
6. Buy and hold doesn’t ALWAYS work.
- If stocks don’t seem cheap, stand aside.
7. Bear markets begin in good times. Bull markets begin in bad times.
8. If you don’t understand the investment, don’t buy it.
- Don’t be wooed. Either make an effort to understand it or say “no thanks.”
- You can’t know everything, so don’t stray far from what you know.
9. Buy value, and sell hysteria.
- Paying less than the underlying asset’s value is a proven successful investing strategy.
- Buying overvalued stocks has proven to under perform the market.
- Neglected sectors often offer good values.
- The “popular” sectors are often overvalued.
10. Investing in what’s popular never ends up making you any money.
- Avoid popular stocks, fad industries and new ventures.
- Buy an investment when it has few friends.
11. When it’s time to act, don’t hesitate.
- Once you’re in, be patient and don’t be rattled by fluctuations.
- Stick with your plan… but when you make a mistake, don’t hesitate.
- Learn more from your bad moves than your good ones.
12. Expert investors care about risk; novice investors shop for returns.
- If you focus on the risks, the returns will eventually come for you.
- If you focus on the returns, the risks will eventually come for you.
Good investing.
References:
Long-Term Investing
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Everyone is a long-term investor up to the moment the stock market correction or crash occurs. “During bull markets, everyone believes that he is committed to stocks for the long term,” opines Billionaire investor William J. Bernstein. “Unfortunately, history also tells us that during bear markets, you can hardly give stocks away. Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy.
Yet, successful investing is a long game. It takes “time, patience and discipline”, says Warren Buffett. When you put money to work in markets it’s best to set it and forget it. Billionaire investor Warren Buffett quipped, “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Myopic Loss Aversion
Investors must manage the battle between fear and greed in their heads and stomachs to be successful in building wealth in the long term. Unfortunately, the fear of loss is generally a more powerful force that overwhelms many investors during periods of steep losses in stock prices.
Even though they don’t plan to liquidate the investment for decades, many investors panic during market corrections and bear markets; causing them to miss out on the often sharp recovery in prices that follows.
Being a long-term investor is more about inner attitude, about positive mindset and about behavior then the asset holding timeframe. Being a long-term investor requires a confidence based on clarity of purpose, rigorous research, and insightful analysis.
Long-term investors should invest in sustainable and growing companies – companies that are likely to be around and that are increasing their intrinsic value for the long term.
Behavior is an essential value of a long-term investor since behavior drives results. Thus, staying calm during a downturn is indeed a critical quality of any long-term investor,
For long-term investors, if you are clear about your investment principles, confident in your investment’s thesis, and genuinely believe in your investment strategy, a market downturn is the best time to invest in companies.
Overall, investing is all about focusing on your financial goals and ignoring the noise and mania of the markets and the financial media. That means buying and holding for the long term, regardless of any news that might move you to try and time the market. “There is only one way of investing, and that is long term,” says Vid Ponnapalli, a CFP and owner of Unique Financial Advisors and Tax Consultants in Holmdel, N.J.
Investor, Mohnish Pabrai, says it best, “You don’t make money when you buy stocks, and you don’t make money when you sell stocks. You make money by waiting.”
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” Warren Buffett
References:
- https://www.forbes.com/advisor/investing/tips-for-long-term-investing/
- https://www.institutionalinvestor.com/article/b18x07sykt3psy/What-Long-Term-Investor-Really-Means
- https://www.forbes.com/sites/forbes-shook/2022/05/10/an-investors-mind-6-ways-it-can-block-the-path-to-long-term-wealth/?sh=7ca749405f7c