By John Reese (@guruinvestor) —
“Perspective shifts us from worry to options.”
Wise words written by Carl Richards, CFP in his Behavior Gap email last week—and timely given the up-and-down market environment we’re facing. Richards, creator of The New York Times Sketch Guy column, also offered his depiction of how perspective can benefit us:
Richards recounts a white-water rafting experience during which, when feeling worry while approaching the rapids, he found comfort in stopping the boat and climbing up on the river bank to get a look at the path ahead. “At river level,” he writes, “it was impossible to see a way through” while the added perspective shed invaluable light on a “clear path through the rapids.”
For today’s stock market investor, maintaining perspective is important on two levels:
- At the market level, it helps direct focus away from day-to-day movements and concentrate more on the long-term view;
- At the company-specific level, it directs attention on business operation fundamentals and share valuations, while also understanding that stocks fluctuate on a day-to-day basis.
It can be hard to sift through all the noise and keep a calm head, particularly in an environment fraught with political and geopolitical unrest (and trade war banter)—it’s the sort of white water that can make any investor want to head for the hills. It might be a good time, then, to turn off the noise and circle back to basics. What is your investment philosophy? What do you believe and what values do you hold at your core? This exercise can go a long way toward helping you keep an eye on the long-term, maintain perspective, and redirect attention from worry to options. Moreover, staying clear on set goals and objectives and sticking to them even when things get muddled can pave the way for smooth sailing over the long haul.
My investing philosophy focuses on several key initiatives: Follow proven strategies, trust facts and figures, stay disciplined, and beware emotions:
Follow proven strategies and trust facts and figures: At Validea, we use investment strategies inspired by some of history’s most successful investors, including Warren Buffett, Peter Lynch, Ken Fisher and the late Benjamin Graham. These strategies are built on key fundamental and financial characteristics that help identify good buy prospects. Benjamin Graham, for example, focused on price-earnings and price-book ratios as well as a company’s liquidity and leverage, while value investing’s greatest modern-day champion, Warren Buffett, looks for high return-on-equity, healthy free cash flow, and consistent earnings-per-share.
Stay disciplined: No strategy will beat the market every month or even every year. If that’s your goal, you might end up just jumping from strategy to strategy chasing returns or the hottest stocks. This is a recipe for buying high and selling low. If you think long-term (over a time horizon of at least five years), you’ll be better equipped to endure short-term underperformance and reap the rewards of a good strategy.
Beware emotion: It’s easy to get swept up in an exciting story surrounding a stock (and buy it) or get consumed by a negative story (and sell it). But doing so without first taking a look at the numbers can lead to ill-fated actions. Good investors don’t let hype influence their decisions.
There will be times when it’s hard to see what’s in front of us. In investing, our emotions and biases can be the biggest culprits to derailing our long term plans. However, by taking a step back to find perspective and by staying focused on what matters and adhering to a sound investment process, you can help avoid many of the mistakes that get investors in trouble.
John Reese is founder and CEO of Validea.com and Validea Capital Management, LLC. Validea is a quantitative investment research firm and Validea Capital, a separate company from Validea.com, which maintains this blog, is a asset management firm offering private account management, ETFs and a robo advisor, Validea Legends and Validea Legends Income. John is a graduate of MIT and Harvard Business school, holder of two US patents and author of the book, “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Follow John on Twitter @guruinvestor.