Where To Run When The Financial World Hiccups

There is a thought in investing that claims in times of chaos, all investment types are correlated. As we can see just now, bonds are falling, the stock market is falling, real estate prices, crypto is falling, and I suppose many other things are feeling poorly.

I am not a fan of losing money, even on paper, but it is unavoidable here in the real world. The important question is, what should you do about it?

What should you do?

Try to understand what’s happening

One of my neighbours years ago was a high-powered stockbroker,  His advice, I think, is wise. “Sell until you sleep.” It applies to both the highs and the lows. People sleep too little when things have run up beyond their expectations, and they have the same problem when the market falls.

Selling everything is not likely your best move.

We are emotionally driven creatures, and that accounts for most of the volatility in the market. Fear is stronger than greed, so an old adage proves out, “markets grow slowly and fall fast.” That leads to an approach to your concern. Markets that fall fast tend to:

  1. Overshoot reality
  2. Recover more quickly than ones that fall slowly.

Rather than looking to a day-to-day result, look more forward. This is the time to go back to basics. A stock is a share of a business. The value of the business is not always reflected by the stock market. The stock market is made up of people buying and selling for their own reasons. Emotion plays a part.

Is Microsoft at $260 per share any different than it was at $343 six months ago? Probably not much different. Their sales may not grow as quickly as people hoped, but that’s not all bad. Businesses need time to stop and think, too. Growth is tricky. There are other things to care about than sales growth.

Compared to last November, Apple is almost unchanged. Facebook at $189 is down from $341. Netflix, formerly $660 per share, has become $166 per share in that same period. Pay less attention to indices and look for quality businesses. When you think business instead of stock, you see different things.

When you sell until you sleep and have thought through the business idea, you will have a clear idea of how to redeploy your capital.

Advice you will hear

“It’s normal; just wait for the recovery and all will be well. You can expect a correction at least once every four years.” That is not bad advice, but if you want to understand and prosper, treat this as a time to learn and think and act on solid facts. It’s a good habit.

If you don’t need the money now, there is no problem reorganizing. Ideally, to a more well-constructed portfolio. Selling until you sleep is a smart first step, and it provides capital to seize opportunities. Remember the racehorse breeder’s maxim. “Keep the best and sell the rest.”

For those who do need money, it’s unlikely you will need it all, so take what you need and carry on. If you have sound businesses in your portfolio, you’ll be fine in a year or two.

Words to the wise

If you thought leverage was your friend, you might be having second thoughts. Leverage is not your friend except in exceptional circumstances. Most people do not see that and use some sort of formula. Remember that stock market genius is almost always a rising market.

Think about this. “Leverage: – If you’re smart, you don’t need it, and if you’re dumb, you shouldn’t be using it.” – Warren Buffett

For the future, being fully invested is risky. You can diversify some of your emotional risks by having a significant cash holding in your portfolio. It provides opportunities when a sharp drop appears. Your sound businesses will be affected a little, but you’ll have money to take advantage of the opportunities that are sure to appear.

Consider Warren Buffett’s “Hamburger” advice.

“I’m going to buy hamburgers for the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household.  When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying.

– except stocks

When stocks go down, and you can get more for your money, people don’t like them anymore.”

Is he wrong? I don’t think so. People think that way because they don’t understand the ideas of market price and fundamental value.

The only time the market value of a stock matters is when it is time to buy or sell.

The Bits To Take Away

Stocks and money are not the same things. When you buy a stock you give up money and can only get it back by receiving dividends or selling. If you think of stocks as money, the prices the market delivers each day won’t make as much sense as they should.

Markets fluctuate because people and their baggage drive the stock price. The business value is something else again. You should know how both are formed and trade on the differences that appear.

Know yourself. Most people are their own worst enemy.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

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