Experience is very underrated by those that do not have any! Needless to say, these past few years have been a time that provided many lessons to those of us that have been in the financial services business a long time (too long to mention) as well as those that are still wet behind the ears. There is an old saying on Wall Street that goes as follows, “investors make money during bull markets and learn during bear markets.” That said, given the recent market weakness, we thought now might be a good time to reflect on some of the lessons we have learned over the past few years.
An investor buys perceived potential and sells a lack thereof. What did you do when the stock you bought ran up to ludicrous levels? Or, what did you do when the stock you purchase began to tumble as the potential for future growth declined? Have strict buy and sell disciplines. The most important lesson that we have learned from past bear markets is that a sell discipline is more important than a buy discipline. Don’t chase hot stocks. Look for stocks with solid, long-term growth potential.
When investing, don’t look to get the final ten percent of a stock’s move upward or believe that you can buy within ten percent of the bottom. Rather look to capture that middle eighty percent. Regarding the domestic stock market, we believe that at current levels there remains opportunity.
“Stay on the offensive. Always look for good ideas and push out the mediocre ones. If every week you find a couple good things and say, ‘stock number thirty-one in the portfolio is okay, but these are better. Sell number thirty-one.” (Peter Lynch, legendary manager of the Fidelity Magellan Fund). Don’t fall in love with a particular stock or sector! Continually challenge your ideas among yourself as well as your peers. Change when it is appropriate. Don’t carry negative baggage around!
We know that it is impossible to be right all of the time. We just want to be right over time. Recognize that there are many times when you may be wrong! Remember, a .300 hitter is in the hall of fame. However, that batter gets out over seventy percent of the time. The key is when you make a mistake, sell and move on.
Excessive optimism doesn’t yield stock prices at attractive levels, excessive pessimism does. There exists a lot of skepticism about the current rally in the stock market. That is good. The markets climb a wall of worry. Remember during 1999 or 2007 when excessive optimism reigned? Look what that wrought! Now, there is adequate pessimism! We believe that this pessimism as well as solid economic fundamentals bode well for the market over the next twelve to eighteen months.
“I did so by never becoming too confident in having made the right decision.” (Former Treasury Secretary Robert Rubin, upon his retirement and in response to the question of how he lasted so long) As mentioned above, always challenge your ideas. Be concerned with the downside. The upside will take care of itself.
“I work in a humbling business. That’s what Wall Street is all about. If you are afraid to be humbled by the market, stop reading and go buy a bond.” (Market Analyst, James Cramer). Self-explanatory.
“Try not to react too much to the market because the market is reacting to things you don’t want to react to. Keep your eyes on the horizon and ask yourself, ‘which stocks will I be kicking myself over if I don’t own those stocks five year from now” (Kevin Landis, Fund Manager, First Hand Technology Value
Fund). We believe that those stocks you will be kicking yourself five years from now if you don’t own operate in the technology, health care financial services and energy industries.
“Once a bull market get under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, the people superimpose an ‘I can’t miss the party’ factor on top of the fundamental factors that drive the market.” (Warren Buffett, C.E.O., Berkshire Hathaway). That said, at the end of a bear market, stocks are held by their rightful owners. That is where we are now, fundamentals will rule. Never again be
suckered into buying a stock just because it is going up. Do the research. Know your holdings.
“An investor doesn’t pull up his turnips every day to find out if they are growing.” (U.S. Treasury Secretary, Paul O’Neill). What do you do? Do you check your portfolio every day over the internet? If so, relax and let some time pass! If you purchased a security for the long haul, don’t check on it every minute. Remember, “a watched pot never boils.”
We hope these little tidbits of information brings into perspective how you view your investments. Perhaps you have fallen into some of the traps noted above. If so, don’t carry around that baggage. Make an investment plan now.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.