Summary

  • I stopped investing emotionally, stopped following the crowd.
  • I constructed a solid plan based on fundamental analysis. A plan does not guarantee success but it certainly reduces the risk of failure and, as a result, lowers the level of stress.
  • I learned to manage my expectations.
  • I buy within corrections to increase the margin of safety and significantly boost the odds of my investing success.

 

Recognizing and Stopping My Cycle of Emotional Investing

The most valuable investing lesson I’ve learned over the past 25 years is that the greatest threat to my investing success is losing control of my emotions. Letting emotions dictate my investment strategy will jeopardize my long term success and put me on a fast track to failure. I’ve made that type of mistake early on in both my business and investment life. I did not lose everything, but my returns were mediocre at the best of times and I paid out a lot of my gains in broker commissions and fees.

My investment decisions were heavily dependent on the opinions of people I didn’t knoEmotional-Investing-1-675x380w and what the media happened to be saying about a particular company, sector, or the overall market at that moment in time. So when the market was great, the media and pundits said “buy”. When the market was nosediving, “sell”. Classic “buy-high-sell-low”. I was not investing in companies, I was speculating on price movements. The entire process was loaded with stress from the unknown: information I did not have. Guesswork and gambling were essentially shaping my financial future and I was not having great successes with my predictions. It took several years, repeatedly making the same types of decisions, to realize that I had to change what I was doing. To get something different I had to do something different. I had to break the cycle of terrible results. As Albert Einstein said, insanity is “doing the same thing over and over again and expecting different results”. I had to find a different approach to making decisions; a better way of investing in stocks.

 

Constructing a robust plan based on fundamental analysis and my contrarian attitude

Investing success came to me by way of performing fundamental analysis and being a healthy skeptic about information I did not receive from its source and assess myself. Being deeply skeptical about information pretty much has me rejecting popular opinion out of hand and holding firmly to the results of my own analysis. The bursting tech bubble in 2000 marked a decisive pivot point and saw me, gingerly dipping my toes into the value investing waters, testing my new approach, and buying selected tech companies, which had come crashing down. Success! I’ve stayed invested since that crash through to the present. Despite speculative bubbles, I have added to positions during and after the 2000 and 2008-2009 crashes. Corrections over 10% also get my attention as a buyer of equities. For value investors like us, corrections and crashes are when stocks go on sale. Time to buy! Almost always when markets seem to be at their gloomiest that is when a buying window of opportunity opens.

This is one part of my highly opportunistic investing strategy that has been very successful though, I should caution, though, that it takes nerves of steel to remain calm and a supreme confidence in my investing methodology to tune out the widely televised fear, panic and chaos which typically dominates the airwaves during severely negative market movements. One of the largest purveyors of panic and chaos, provoking emotional decision making is the media without naming any of the popular business channels since they’re all pretty much the same. Frankly, I think we all fully understand that we should buy low and sell high but getting caught up in the market hype, fear or greed generated from the media will cause you to buy high and sell at the bottom, emotionally investing. I tune out media as a source of investing information. They are just background noise.  I do my own research, I get solid professional advice, and I do not depend on the mass media for my strategy or decisions.

 

Having realistic and simple expectations based on historical precedent

I am a market optimist. My expectations are that, in the long term, valuations and dividends of solid companies will increase. That’s pretty much all I expect from equity markets; what I see in the future. That is not a prediction pulled out of nowhere, it is based on market history going back decades, even as far back as to the 1920’s.

Generally investor expectations can be influenced by an infinite number of factors, the biggies are: monetary policy (eg: Federal Reserve QE program), fiscal policy (eg: ObamaCare), inflation (eg: sustained high inflation generally means lower corporate profits), fund flows (eg: mutual funds money flows)….I can go on, the list is endless. All of these factors are very useful to be aware of and important considerations but, at best, they are difficult to quantify and price into a portfolio. At some point decisions to go long a position based simply on the qualitative information becomes speculative. Notwithstanding luck, keeping your fingers crossed, that position has a significant risk of loss from, among other things, popping of an over inflated asset valuation bubble. I am personally not at all comfortable having “luck” play such a large role in my financial future.

So, I have only one expectation, long term valuations and dividend of solid companies will increase. To make investment decisions, I focus on the fundamentals, the underlying condition of a company, which has affected its business to give me an insight into its future prospects. The company’s financials, business model, industry and competitive environment, key managers history and their performance, etc are all put under the magnifying lens. If everything looks positive and the data points to some sort of estimate of the intrinsic value, then I buy its security when it is trading at less than that value. It is long. hard work which takes hours every day. but I thoroughly enjoy it. My strategy does not guarantee success but it certainly mitigates many investment risks and minimizes losses. As a result, I sleep very well every night.

 

Taking the bull by the horns during market corrections

Corrections are a time when the market has essentially absorbed downside risk. At this point upside potential is at it’s highest. If the market has undervalued a company, in the case of a crash or a broad based correction, its value can fall below its estimated intrinsic value, and it then becomes a target for purchase at a discount.  Emotion is effectively removed from the equation. I know what I have to buy and at what price. I just don’t know when that right price will occur. As such, the daily movement of the stock price is of no concern unless it moves into my target range, providing an opportunity to buy the stock at a discount or sell it at a premium to rebalance. Patience has been an ally and I’ve been rewarded; after the financial crisis, I purchased SPDR S&P Dividend ETF and several dozen other positions in the US, Canada and Europe. The S&P went on to return 13% , 29% and 11% in 2012, 2013 and 2014 respectively.

 

Final Thoughts

I’ve found success by adhering to a sound investment strategy and execution methodology based on the principles of value investing which effectively strips the emotions of fear and greed out as a factor affecting the sale or purchase of a security and allows me to focus only on facts. I find it by far less stressful than the alternative.

How did you learn “to stop worrying and love the markets”?

 

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