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.
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.
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!