Making decisions when managing your capital is never an easy task. There are an infinite number of variables that can encourage or discourage you from buying and selling stocks.
It’s particularly difficult to decide how to manage your portfolio at the moment. The economy’s outlook is weak, and yet investor sentiment has improved dramatically since the S&P 500 reached its 2020 lows in March.
Howard Marks (Trades, Portfolio) has a sound track record of successful decision-making when apportioning his capital. The Oaktree Capital co-founder’s capacity to go against stock market trends and focus on company valuations are likely reasons for his fund’s outperformance of the S&P 500 over the long run.
Ignoring market trends
It may be tempting to buy stocks at the moment because they have recently been on an upward trend. However, the economy faces an uncertain outlook that could cause investor sentiment to quickly change.
Therefore, instead of focusing on trends that may or may not continue, spending your time analyzing company fundamentals could be a better idea. They could provide you with a more useful insight as to whether a stock is capable of producing growing earnings that are rewarded through a higher valuation over the long run.
As Marks once said, “There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing, as I hope I’ve convinced you by now, requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful."
Focusing on value
The uncertain economic outlook means that valuing businesses is more difficult at the moment than it was previously under more benign trading conditions.
However, valuing companies is an excellent starting point when it comes to deciding how to apportion your capital. It provides you with a guide that can determine whether there are attractive investing opportunities available in the stock market at a given point in time.
At the moment, it may be worth demanding a wider margin of safety than usual when deciding whether a stock offers good value for the money. A margin of safety can provide a buffer in case a company’s financial performance disappoints during a likely period of weakness for the economy.
As Marks once said, “The best foundation for a successful investment—or a successful investment career—is value. You must have a good idea of what the thing you’re considering buying is worth. There are many components to this and many ways to look at it. To oversimplify, there’s cash on the books and the value of the tangible assets; the ability of the company or asset to generate cash; and the potential for these things to increase.”
Looking to the future
One way of deciding how to apportion your capital is to fast-forward to the future and look back on the decisions you need to make today. This may help you to put your present situation into perspective.
This does not mean that you should try to predict your future financial situation. Instead, it means that you should consider how you will view today’s decisions at some future point. This could provide a degree of clarity when deciding how to apportion your capital.
Marks once discussed how he uses a similar technique when managing his portfolio:
“Try to travel into the future and look back. In 2023, do you think you’re more likely to say, ‘Back in 2018, I wish I’d been more aggressive’ or ‘Back in 2018, I wish I’d been more defensive’? What you think you might say a few years down the road can help you figure out what you should do today.”
Read more here:
- Warren Buffett on the Advantages and Disadvantages of Holding Cash
- Mohnish Pabrai on Investing in These Precarious Times
- Peter Lynch on Investing During an Uncertain Economic Period
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