During a recent ten day stretch, the daily movement on the Dow Jones Industrial Average was an eye-popping 481 points. Wow! That will give you whiplash.
The news media ran non-stop commentaries about recessions and geo-political tensions. Headlines flashed making us think something truly amazing had happened.
However, the logical investor realizes there are important lessons to be learned. He are a few key points.
According to a recent survey from the National Association for Business Economics, 38% of 226 economists surveyed think we will have a recession in 2020. This scares people.
Recessions happen on average once every seven years. At some point, we will have a recession. However, it also means we have survived every recession we’ve ever had.
Furthermore, if there is a 38% chance of a recession—it also means there’s a 62% chance we won’t have a recession. Is the glass 62% full or 38% empty?
When interest rates drop, financing becomes more affordable. This is true whether discussing mortgages, car loans or corporate borrowings. However, at the same time savers and fixed income investors are penalized.
There is virtually no way fixed income investors will grow their wealth net of taxes and inflation in the current rate environment. This has pushed many traditional conservative investors into the stock market in search of returns.
This may work. However, it does nothing to lessen the volatility of the stock market. If anything, we may be in for increased volatility. To benefit from stock market returns, investors must have a strong stomach and a long time frame (10+ years).
When interest rates drop, the local currency becomes weaker relative to world currencies. Politicians will often lower rates to weaken their currency in an effort to stimulate exports.
Although the US has the dominant world economy, we do not live in isolation. There are consequences to our decisions. The US cannot dictate to the rest of the world without reciprocal reactions.
Politicians in other countries also adjust interest rate policy to weaken their currency. In reaction to the US lowering rates, China did the same. Everyone is attempting to stimulate their respective economy.
We are anticipating that US interest rates will continue to decline placing further burden on fixed income investors. This needs to be factored into your decision making. The fixed income portion of your portfolio will continue to be under increasing pressure.
The hype of the last two weeks reminded me of being in a Vegas casino…the lights, the sounds, the emotion. Compare the ding-ding-ding of a slot machine to financial news reporting. The simulus is overwhelming. It is designed to illicit maximum attention and emotion. It is not designed to deliver fair or unbiased information.
Logical people know the slots are a bad bet with the odds deeply against you. Obviously, predicating your investment strategy upon a slot machine jackpot is a poor plan. And yet, every day average people are allured by the flashing lights, dinging bells and screams of boo-yah. They are all designed to distract logic and illicit emotional decision making.
Emotional decision making is not investing. When you make emotional investment decisions, you are being manipulated by strategies designed to hype trading. The more you trade, the worse your odds are of productive investing. Do not let the siren song of the trader pull you in. The way to win the traders game is to not play. Don’t get sucked in.
Increased transactions magnify seen and unseen trading costs and taxation. Most likely your CPA will charge you more as your tax return will be a nightmare.
Smart investing is a game of logic and discipline. It is not about testosterone fueled bragging. To be a successful investor, set a goal of being half CPA and half librarian. Quietly sit and do your research with no TV or external noise. Your job is to read financial statements and analytically think about the competitiveness of business models.
Warren Buffett has often said the last thing he does is pull a quote on a given company—the LAST thing. Spend your time studying the balance sheet and the quality of a company first. Look for businesses that consistently generate profits over decades. Only once you find and thoroughly analyze consistent businesses should you even begin to look at the stocks price.