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Robert Stephens, CFA
Robert Stephens, CFA
Articles (373) 

Adopting a Successful Investing Mindset in the Current Crisis

How viewing your investments differently could improve your returns

May 21, 2020 | About:

The uncertain economic outlook presents numerous buying opportunities for long-term value investors, in my opinion. However, it can be difficult to adopt the right mindset to take advantage of them when economic data is weak and investor sentiment is highly changeable.

Looking at the following viewpoints and strategies of successful value investors such as Warren Buffett (Trades, Portfolio), Benjamin Graham, Peter Lynch and Seth Klarman (Trades, Portfolio) has been of great help to me.

Focusing on value

It is tempting for any investor to constantly monitor changing stock prices. They can have a dramatic effect on your portfolio’s valuation when volatility is high across the stock market.

However, focusing on the underlying value of your investments rather than their short-term price changes may be a better idea. It could make it easier to spot discrepancies between what you think a company is worth and its current price, which may suggest there is a value opportunity on offer. As Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio) famously said, “Price is what you pay. Value is what you get.”

Ignoring your emotions

Becoming increasingly fearful during an uncertain period for the economy is normal. No investor can expect to have no emotions during periods where their holdings are falling in value.

However, ignoring those emotions when deciding how to apportion your capital is imperative. Emotions can lead to overly-cautious behaviour during market downturns, as well as overconfidence in bull markets. Self-discipline is required to use company fundamentals when determining the most efficient use of your capital.

Successfully using this strategy is a key reason for Peter Lynch’s 29% annualized return while running the Magellan fund between 1977 and 1990. According to Lynch, “The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”

Predicting stock market movements

Trying to guess the stock market’s future price movements could be an unproductive use of your time. It is impossible to know how a wide range of variables will impact on stock prices.

Therefore, focusing your attention on analyzing the strengths and weaknesses of companies could be a more efficient strategy. It may allow you to find companies that can survive the economic downturn and even benefit from it.

Avoiding the temptation to try to predict the stock market’s future performance has previously been discussed by Baupost chairman Seth Klarman (Trades, Portfolio), who has delivered 20% compounded returns since the group’s creation in 1983: “In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.”

Investing in real businesses

Adopting the mindset that you are a part-owner of the companies held in your portfolio could make it easier to take a long-term approach to investing in an economic downturn.

Investors who view themselves as a part-owner of a business may be less inclined to speculate on volatile stock prices compared to other investors who consider their investments to merely be names and numbers.

This approach was used by the father of value investing, Benjamin Graham, to apportion his capital throughout his successful investing career. As Graham once said, “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”

Disclosure: The author has no position in any stocks mentioned.

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