I admit it. I’m not perfect. It’s possible I possess a quality or two that occasionally drive my wife crazy (not in a good way). I’m really curious to hear her response upon reading this, btw.
One of those qualities is that I’m annoyingly, obsessively rational. Sometimes this may make me come off as “cold” or blunt, which isn’t always ideal, but it does make me extremely well-suited to manage money.
The reason this quality is an advantage in investing is because markets are not always rational precisely because market participants aren’t always rational. In fact, people become quite emotional when it comes to their money…understandably so. But that means people who can leave emotions out of it and remain objective have an advantage over time.
I don’t get caught up in the mania of bubbles. I don’t care if the price of an asset is skyrocketing if the fundamentals don’t justify it. I don’t care if my neighbor is getting rich while speculating. I’m not going to buy an asset because of fear of missing out (FOMO), temptation to get rich quick or because I can’t control my emotions to chase a mania.
Conversely, I won’t be bothered when the prices of good assets are falling off a cliff…if the fundamentals are justified I will be buying that asset even when everyone hates it and is selling out of fear.
I came across a great quote recently:
“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
Too many people the last few years have abandoned sight of this. Asset markets are often abused as casinos or as entertainment… perhaps due to trillions of free money and more downtime than usual.
Sure enough, we’ve seen a crash in many of these low-quality assets with many falling 50% to 90% the last few months. I’ve talked about this “rot” occurring under the surface previously. It was just a matter of time before the rot began to affect the headline indices as it has begun to do this year.
Here are just a few examples in some of the more popular assets, but there are many more:
To avoid the appearance of cherry-picking, approximately 40% of companies in the Nasdaq Composite are down at least 50% from their highs!
Ultimately, when buying a stock you’re buying a long stream of expected cash flows. This is why, when I get asked about individual stocks (which was happening with increasing frequency in the second half of 2021), I respond with, “what is your view of expected cash flows over the long-term?” If you can’t produce that, or haven’t done that work, then you’re simply speculating / chasing and you’re not ready to make that purchase.
The sheer number of people “investing” without view of the underlying fundamentals other than “it’s supposed to grow a lot” is in itself a sign of concern. Certainly it’s a sign of bubbles past regardless of the underlying asset (tulip bulbs, Nifty Fifty stocks, Dot-Com stocks, real estate, cryptocurrencies, etc…).
I’m not saying speculating is bad or even that I don’t speculate. I’m simply sharing that we must be honest about what we’re doing when we are speculating, understand the risks of so doing and size our positions accordingly. Let’s not risk our future financial independence in order to speculate.
This is also not to say the market won’t rally from here after it’s worst start to a year in history. In fact, I believe the market probably will experience sharp rallies.
The point is to remind everyone to be rational and objective. Don’t get caught up in manias and, when the bubble bursts, avoid letting fear drive our decision-making. The best way to do this is to have a disciplined approach grounded in time-tested principles firmly implanted beforehand, focus on quality assets and remain disciplined even when tempted to chase or bail.
I’ll leave you with a quote I’ve shared in the past:
“Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”
– J.P. Morgan
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.
This is NOT investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.