With the two-year anniversary of the pandemic upon us, most people were just hoping for a return to calm and normalcy. The first quarter delivered anything but calm and has reminded investors that logical decisions and portfolio management are harder than they look.
Here are a few lessons to take from the last three months:
The risk of yesterday will be different than the risk of the future. It is something you have never thought of that catches you off-guard and creates massive volatility. At the end of 2019, people weren’t considering a global pandemic. At the end of 2021, most people weren’t thinking about Russia invading Ukraine.
Then, suddenly, that is all people are focused on. You can’t forecast future headlines or how they will impact the economy and stock markets. This is even more reason to own predictable and consistent businesses based upon where you want to be in 5 to 10 years.
Most of human history has been fraught with conflict and war. It hasn’t been until recently that the consensus expectation is peace. You can get away with overspending on defense and not needing it, but less likely to get away with underspending and playing catch up.
Countries, and their leaders, have the ability to change the rules of the game you’re playing, and their agenda may not align with yours. Despite the flaws of the U.S., we should all be reminded of the stability our nation enjoys and the rule of law.
Valuation matters. Just because the price of an asset moves precipitously, does not mean it is rational, or enduring. Use common sense, and don’t buy something just because the price has gone up and you think the next sucker will pay even more.
Tomorrow will not look like today. One day you’re trading Russian stocks, the next day you can’t. Be mindful of the risks you are taking when deploying capital and weigh those risks accordingly.
The invasion and corresponding response by corporations around the world reflects how things can change rapidly. Be ready to analyze and interpret the new information. As you gather new information, give yourself the freedom to change your mind. Facts and the delivery of information are constantly changing.
We model risk in spreadsheets with the assumption that humans are logical and rational. They are not.
When times are good, we always think we can take on more risk. And then, about once a decade, we are reminded of the wisdom of living a more conservative life. When unthinkable things happen, will you be in a position to survive?
Make sure your cash flow needs are covered first. Then think about investing for the long term and remain invested.
Know the game you are playing, not your neighbors’ game. Ignore what your neighbor brags about. You and your family are the only ones that matter. Your neighbor is most likely rather delusional.
Know what is within your control and what is not. Identify what is important and what is knowable. Important things beyond your control, or outside your realm of knowledge, require a hedge or insurance.
Keep an investment journal. Be diligent and honest. Document what worked and what did not. When you are feeling brave, read the most tense moments in your journal.
The world is awash in an abundance of information and opinions. In the grand scheme of things, very little reported information matters and even fewer opinions matter to you and your family.
Do not make snap decisions. Take the time to sit and think. Investing, as opposed to gambling, is slow and methodical. It is logical and considerate. If you apply it in this manner, you can ignore the daily noise.
Keep emotions in check and realize that owning good businesses allows you to wait out the storm and maintain purchasing power.
Patience allows you to not have to time the market. There will never be a big flag waiving that says, “It’s all clear to invest now.” Clarity only exists in hindsight.
Be open to opposing viewpoints. It is quite possible that someone knows something you don’t or can offer a different perspective which allows you to see things more broadly. An open mind can make you money.