There are no two ways about it - last week was a trying one. Sectors were crushed. Oil slipped below $38 a barrel. Individual stocks broke 52-week lows... then yo-yoed to new highs. At Investment U, we found ourselves examining the difference between “traders” and “investors,” how to use volatility to bag quick double-digit gains and what lessons you can take away from the Dow’s 1,000-point drop.
If you spent the seven days glued to the markets as we did, you may be feeling a bit... numb. Perhaps you’re questioning if all the stress is even worth it. (Admittedly, an internet-free shack in the woods does sound mighty tempting right now.) You may even be asking yourself, “Just what’s so great about investing, anyway?”
We often talk about the pursuit of liberty through wealth. It’s a simple idea: Money offers peace of mind. It enables you to explore your true passions. And the safest, easiest - and most liquid - way to begin establishing lasting wealth is by owning a diversified portfolio of investments. Not just stocks, but also a basket of bonds, Treasurys and precious metals.
Will there be more volatile times? Absolutely. Markets move in cycles. Bears follow bulls, bulls follow bears, etc. But history has shown that disciplined investors - with a proper allocation of holdings - greatly outperform the herd. In the end, it’s only your own state of mind that can hamper or bolster your profitability. To hammer this point home, we’re dedicating today’s “Lecture Notes” to a piece by Alex that originally ran back in 2014. We think you’ll find his comments especially poignant today.
An Investor's Worst Enemies
It's often been said that the average investor's downfall is fear and greed. He tends to be too greedy to sell at market tops and too fearful to buy at market bottoms.
Yet fear and greed aren't an investor's worst emotions. Indeed, they have much to recommend them.
Greed - more palatably known as "rational self-interest" - is what keeps us on the hunt for worthwhile opportunities. It brings out animal spirits, the lifeblood of capitalism. If we didn't feel a desire to improve our lifestyle and circumstances, we wouldn't undertake ventures. The free enterprise system - the greatest engine of prosperity the world has ever known - requires risk takers. We need entrepreneurs to start companies and investors to capitalize them. In short, Gordon Gekko got it right. Greed - the desire to get rich - is good.
Fear is another essential ingredient. It keeps us from getting carried away. Fear reminds us that the pursuit of wealth has a downside: loss. And it can be painful. As Fred Schwed wrote in his classic 1940 book Where Are the Customers' Yachts? "There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description I might offer here even approximate what it feels like to lose a real chunk of money that you used to own."
Fear and greed balance each other. Greed keeps us looking up. Fear reminds us to "look out below!"
In my experience working with many hundreds of individual investors, what foils too many investment plans is not fear and greed but hope and regret...
Hope, in particular, has no place in any serious investor's tool kit. Finding yourself saying "I hope the market keeps going up" or "I hope this stock turns around and starts going the right way" is like hoping no one checks your alibi or audits your tax return. It's a clear indication that you're already off the rails.
We invest in stocks not because we hope the current trend will continue for another month or another year, but because owning a diversified portfolio of fine businesses is the time-tested method of building and protecting wealth. Hope that stocks will keep trending up is often futile, a faith that will always be undermined eventually. But owning great companies to build long-term wealth? That doesn't disappoint.
Except in the short term. Then you may find yourself haunted by hope's evil twin: regret. As in "Why did I ever buy that company to begin with?" or "Why didn't I diversify outside the stock market?"
These are examples of counterfactual thinking. Thoughts like these generally begin with "If only I had..." or "If only I hadn't..." As Jason Zweig writes in Your Money and Your Brain, "Counterfactual thinking creates an alternative universe in which outcomes are always knowable and the right thing to do is always obvious."
It's make-believe, in other words. What you need instead is a proven investment strategy that allows you to take advantage of the uncertainties inherent in the market. The Oxford Club's investment system, for instance, allows us to identify worthwhile opportunities, size our bets, hedge our risk, protect our profits and preserve our capital... whatever the markets throw at us.
Indeed, that's why the independent Hulbert Financial Digest has ranked our flagship newsletter The Oxford Communiqué among the top-performing investment letters in the nation for more than a decade.
In short, fear and greed keep us optimistic, but sober. Hope and regret? Those are signs that someone is out of his element, over his head... or just dreaming.