Investing is not speculating on emotions

 

Sometimes, I get the feeling that the more I read the financial news, the more people are going crazy. It’s either overly optimistic or very pessimistic investors using the public space to scream their vision to the world. They come with charts, facts and tons of data to support their dogma.

 

I’m writing this post to present both philosophy and how an investor can be tricked when reading a well researched and written article by either a bear or a bull.

 

The Bear

 bear market

Bears always believe the next crash is just around the corner. The most fanatical are looking for the Black Swan at all times while others are expecting a correction between 10-20% each year. The thing is that there is always a reason why the market will plummet “this year”. You don’t believe me? Here’s a list of the past 13 years with a reason for NOT investing:

 

2000: Techno bubble burst – NASDAQ is agonizing

2001: September 11 – World Trade Center under attack

2002: WolrdCom fraud (amongst others)

2003: War in Iraq – Oil at risk

2004: Terrorist attack in Madrid – Situation in Iraq getting worst

2005: Terrorist attack in London – The problem in Iraq still not solved

2006: Terrorist attack in Bombay, conflict between Israel and Lebanon

2007: Housing market overheating in the US

2008: Lehman Brothers bankruptcy – The banking system collapse

2009: Government debt problems (notably Greece and other European countries)

2010: China slowdown – resource prices dropping

2011: More Government debt problems – Panic at the White House with regards to the debt ceiling

2012: US election – nobody knows where it will head

2013: Cyprus, BRIC slowdown, riot in Brazil, Market peak, etc

 

So tell me, when was the time to invest if you were bearish all these years? There are always a few good reasons each year that could lead to a market correction. The truth is that most of them won’t truly affect the economy. However, it doesn’t mean it doesn’t generate fear and market volatility.

 

When you are in contact with a bear, be careful to analyze his facts and the real impact on the economy instead of following him down the path of madness. Regardless of what they say, the sun will rise tomorrow and you will still have to go to work.

 

The Bull

 bull market

On the other hand, some people are definitely too optimistic. These are the guys who told you that revenues don’t matter for techno stocks as the new money is generated by the number of visitors and page views, that the housing market is set to surge in 2007 as we never created so much wealth in so little time, that the barrel of crude would hit $200 before 2010 and that gold will finish at $3,000/oz by 2013, etc, etc, etc.

 

When you think about it, there is a lot of great potential in several companies. The key is to pick companies that will realize this potential and generate money out of it. The potential is always there, but you must ask if there is more than simply a candy thesis behind the bull’s words.

 

In other words, if you speak or read a bullish article, you will see the world with your pink sunglasses and drink a lot of Kool-Aid. You must take everything with a grain of salt and look at how the potential can be materialized this year and not after 20 years. Because yes, the barrel of oil will reach $200… but it won’t be such great news if it does it in 2033!

 

The Moderate Optimist

 

There are probably as many good reasons to invest “this year” than there are bad reasons. This is why we have moderate optimists. Moderate optimists think we should invest in the stock market but shouldn’t be too hyped about it. They are usually conservative economists working for banks. If you read between the lines; they are somewhat paid to tell people that we should trust the stock market but don’t expect huge returns in order to avoid being sued.

 

While sometimes they seem to not have an opinion at all, I would rather read articles coming from moderate perceptions than getting hammered that hell is coming to earth or that we are going to be rich by the end of the quarter. Unfortunately, since the apocalypse is more fun to read about, nobody invites a moderate optimist to the Oprah show.

 

How You Can Truly Get Your Head Around It

 

Over the years, I’ve learned to be skeptical about what I hear. When it’s too good to be true, it is usually the case. When it’s too horrible to happen, it is also the case. It’s definitely not easy to get your head around this mass of information tell you to go right, left and center all at the same time.

 

The same problem arises when you pursue a stock analysis. When you read financial statements, you are reading a document that was created by the company hoping you will buy or recommend buying their shares if you are an analyst. On the other hand, you may read a stock commentary that will influence your perception of where short sellers, hedge fund managers and others who want the stock to drop telling you the company is not heading in the right direction .

 

The only solution I’ve found is to determine carefully my sources of information and cross reference crucial info to make sure they make sense. This is why I follow a big list of websites for stock research. If all the media says the same thing, chances are that we are getting closer to reality. I always remain away from any big trends (when it’s too pink or too dark, there is something behind it!).

 

Then, there is nothing better than cold hard numbers. The written blah blah blah at the beginning of a financial statement can make you believe this is the best company of the world but the numbers won’t hide the truth from you. Looking at cash flow to know where the money comes and where the money goes is crucial for a dividend investor. After all, dividends are paid from free cash, nothing else.

 

Finally, I’ve worked for three years to establish my investing rules and I stick to them most of the time. These are my ultimate guidelines to determine whether to buy or sell a stock. Without investing rules, you will drift from one trade to another always trying to hit a homerun. Chances are you will endurr more strikeouts in the process! If you haven’t setup your investing rules yet, I think you should do this today in order to avoid confusion from what you read and what you are told!

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6 Comments   |  

6 Comments

July 17, 2013, 11:57 am

Do you have a post on your investing rules?
I really need help with it. My investing rules are not well defined and I need to work on it.

Mike
July 17, 2013, 1:31 pm

Hey Joe,

good idea! I think I’ve mentioned them here and there but I’m not quite sure if I have a specific article about it. I’ll do that shortly :-)

July 17, 2013, 4:02 pm

@RetireBy40
Dividend Ninja had a nice set of written rules too if you want inspiration.

This is not bull vs bear but here it goes … I was recently in a conversation where someone said that buying stocks was just gambling and I had to reshape the conversation. There are investing strategies that nearly resemble gambling but others can just generate wealth. It’s clear that there is a clear lack of understanding about investing and yet they are still fully invested in the company plan …

July 18, 2013, 3:15 pm

Solid advice. Once you establish your rules you can always look to those rules to help guide you through a market panic or a premium.

July 20, 2013, 7:38 am

[…] The Dividend Guy reminds us that investing is not speculating on emotions. […]

July 20, 2013, 2:17 pm

I am constantly forcing my mind into a scheme that when the market is running up and up and everybody is crazy shouting buy buy buy, I tell myself, calm down, sit tight, do nothing and save cash. When the market turns into an opposite direction and everybody goes crazy and shouts sell sell, I am laughing and start using my accumulated cash buying stocks others are dumping with a baby… It’s not easy to have the opposite point of view. Many times you double guess your stance. What if the stock is really going bad and you should sell too. Not easy.

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