Worrying is a natural part of investing. There are always risks and threats that can have a negative impact on company valuations. As such, it is normal for all investors to consider risk just as much as they contemplate return prospects.
However, not all worries are worth thinking about. Some are either omnipresent or impossible to accurately forecast. Examples include one-off events such as the Covid-19 pandemic. It was impossible to anticipate ahead of time, with similar major events having always been a threat to stock market investors. Similarly, worrying about economic forecasts or company earnings estimates may represent an inefficient use of time due to their unpredictable nature.
Meanwhile, other threats are likely to be far more relevant to investors. For instance, they may include the financial uncertainty that can be caused by a company’s high debt levels. Similarly, investors may rightly become concerned about rising stock market valuations that are in excess of their long-term averages and provide little or no margin of safety.
As such, it is crucial for all investors to focus on concerns that are most relevant to them. This point has previously been discussed by Peter Lynch, who delivered a 29% annual return while managing the Magellan fund between 1977 and 1990. As he once said:
“There’s no such thing as a worry-free investment. The trick is to separate the valid worries from the idle worries, and then check the worries against the facts.”
Buying opportunities
In my view, Lynch’s views are extremely helpful to investors. His encouragement to check worries against facts could help to create a more logical approach to investing. For instance, an investor who relies on fundamentals to make their decisions on how to allocate capital may be more easily able to alleviate their concerns about a specific investment or asset class. This may make them less susceptible to irrational behavior that leads to poor decisions and a short-term outlook.
This idea can be developed further through the use of investment checklists. Investors who have a step-by-step approach to managing their portfolio may find it easier to focus on the specific risks that are most relevant to their future performance. Likewise, they may be less likely to worry about factors that that are outside the scope of their investment checklist, and control, such as one-off events that cannot be foreseen ahead of time.
Of course, the predisposition of investors to worry can also create buying opportunities for their peers. For example, investors may be concerned about the outlook for a specific sector or the wider stock market during periods of economic turbulence. This may provide more attractive valuations among high-quality companies than would normally be the case. Investors who can separate valid worries from idle worries, by focusing on facts, could capitalize on them to allocate capital more efficiently.
