Have you thought of selling your whole portfolio to re-invest when things look more stable?
I recently received quite a few questions from subscribers and friends that have been asking themselves exactly that.
What really got them worried were the wild movements in their portfolios. Down more than 7% in a day which is then all made up over the next few days until the next round of bad news breaks, causing another fall.
I am sure you have experienced the same and have been asking yourself the same questions.
When reading or watching the news you must remember that the media focuses on sensation-creating headlines that is nearly always bad news.
You know good news doesn't sell and the more negative and the more sensational the headlines are the more readers they are likely to attract — their main aim.
And if the news itself is not negative enough they will forecast or suggest the most negative outcome to get your attention.
That is important for you to do when reading the paper or watching television is to set up a filter between the news and your brain.
And to ask yourself, "What is fact and what is speculation?" and clearly separate the two.
In most cases the facts are not nearly as bad as they are reported, what is bad is the negative speculation or forecast.
Getting back to your portfolio.
The best advice I can give you for these uncertain times is to make use of the wild market movements, to buy good businesses cheaply, and to look at the past.
Let me explain.
Look at what has worked in investing over long periods of time and look at what long-term successful investors have done. Investors like Graham, Buffett, Klarman, Watsa, Greenblatt and Chou.
And remember to avoid any and all economic and company forecasts.
To refresh your mind as to why, look at the research paper by James Montier which has completely refuted the idea that humans can forecast.
Use forecasts only for entertainment value and do not base any of your investment decisions on them.
Thinking of a 50% drop
Also there is no benefit to you staying out of the market because you think a 50% fall may take place any time.
This is of course always possible, but it is impossible to foresee. Also, your mind tends to give recent events (the 2007 financial crisis) more weigh in your thinking, resulting in you deciding it’s best to stay out of the market in spite of a lot of good quality businesses being available at very attractive prices.
I managed my money through two periods when the market lost more than 50% in a relatively short period of time, 2000 to 2003 with the bursting of the Internet bubble, and 2007 to 2009 with the financial crisis caused by the bursting of the housing bubble in the U.S.
In both cases my wealth looked a lot better a while after the crisis compared to what it was before.
It was painful in between, sometimes really painful but if you keep your eye on the bigger picture remembering that this too will pass and continue to buy good businesses at undervalued prices, over time you will do extremely well.
As always, but even more important in difficult times, you must ensure the businesses you are invested in are not deteriorating.
By a deteriorating business I mean a company that is having fundamental problems with its business model and not just a temporary drop in profits. Here you can think of Kodak (EK) and the problems it had with the invention of digital photography. Or the problems Nokia (NYSE:NOK) had when they realized that the operating system they built their business around was not good enough to compete with their competitors.
If the business is deteriorating it would be better to sell, even at a loss.
What to do
So what is the best thing to do at the moment?
You should use the market volatility to your advantage. As Benjamin Graham said, the market is there to serve you.
And that's why I find it hard to understand when I get e-mails from a lot of potential subscribers saying they are interested in my newsletter but would like to wait until economic circumstances improve or the market stabilizes before subscribing.
That's exactly the wrong way to approach the current market because with all this market mayhem you have a far larger probability of picking up a really undervalued company.
Research in advance
In order to do that you must do your research in advance.
This means when things are uncertain you must:
- Find undervalued companies.
- Do your analysis.
- Read the annual reports.
- Work through your investment checklist
Once you have done this you should do what Sir John Templeton recommended:
Calculate at what price you would be very happy to own the company and put in your order with the limit at this price.
This will put you in the position to make the best use of market volatility. As on a day when is everybody selling, completely ignoring company valuations, your order will be executed and you will become the part owner of a good business at a very undervalued price.
But as I said, you have to finish doing your homework well in advance.
If you haven't done this the current wild market will be of no use to you.