Clarity amongst the noise

Fri, Nov 15, 2013 at 3:20PM

Let's be very direct. We invest our hard earned money to earn a decent return, preserve and grow our wealth and allow that wealth to fund our aspirations, goals and hopes. Whether it is a comfortable retirement with the peace of mind this brings or to send our kids and grandchildren to college; we invest so we can afford to fund what is important to us.


Yet investing has become pop culture. From stock pundits screaming buy! buy! buy! with appropriate sound affects and (more than one) 24- hour investing channel filling time, the noise is drowning out logic. And the logic is to use sound investment principles and to keep in mind WHY you are investing.


Twenty-nine years ago I joined the training program at a Wall Street firm. It is amazing, and a little scary, at how much we have seen in those 29 years. One of the most rewarding is the very smart people I have been able to learn from. Many are true legends of investing, and regretfully many are long retired.


As we are bombarded with so much noise today, I thought I would stand on the shoulders of the many smart people before me and pass on some 'logic'.


1.   There is no 'this time it's different' – excesses are never per­ma­nent.  Dotcom stocks with no earnings all cannot trade for $400. Bonds will not always pay less than 1%.


2.   Mar­kets tend to return to the mean over time.  When markets go too far in one direc­tion or the other, they tend to return to historical norms. Golfers may start with 3 straight birdies. Don't expect 18 straight birdies. Eupho­ria and pes­simism can cloud decision- making.


3.  The pub­lic tends to buy the top and sell at the bot­tom.  I know that is a cliché but unfortunately it plays out time and again. Look at domestic stock mutual fund order flows as recent proof. After bottoming in March of 2009, the Standard and Poor's has more than doubled.  Yet domestic stock mutual fund money flows was a negative 337 billion dollars.  When did the money flow turn positive, with investors buying more than selling?  Money flow turned positive in November of 2012 after a 102% gain.


4.   When all the experts and fore­casts agree – some­thing else is going to hap­pen.


5.   The hard way is always the right way.  In investing, as in life, there are no shortcuts or magic formulas to successful investing. Asset allocation into different asset classes, quality holdings at good valuations and healthy dividends create wealth over time. Success requires hard work particularly in difficult times.


6.   Catastrophes rarely happen.  Yearly, it seems, there are stories of financial catastrophes that will surely destroy your net worth. Y2K will cause all records to disappear. The debt crisis will shut down the world. The downgrading of our debt will turn our dollars into monopoly money.  I'm still waiting for the Mayan calendar to end. With all

respect to real tragedies such as 9/11, the predicted events are noise to fill the media void.


7.   Excesses in one direction often lead to an excess in the opposite

direction.  A pendulum swinging from one arc will swing to the opposite arc until it finds equilibrium. Overbought leads to oversold. Under regulation leads to over regulation. By understanding this, an investor can prepare emotionally for the short term volatility.


8.   Rapidly ris­ing or falling mar­kets usu­ally go fur­ther than you

think, but they do not cor­rect by going side­ways.  The pendulum theory: swing too far in one direction and then the other is still alive and well.


Clarity amongst the noise

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