If investing is stressful and exciting, you’re probably doing it wrong.
Let me rephrase that.
Learning about new businesses and technologies is extremely interesting. It’s one of the main reasons I love my job.
But the act of investing should be boring.
Once you’ve found a stock with a promising future, all you have to do is buy and hold it.
Too many investors want their stocks to go up straight after purchase. However, more often than not the opposite will happen.
And that’s ok.
It’s ok for you to hold a losing position. What you don’t want to do is sell a losing position.
It’s why one of the best investors of his generation, Mohnish Pabrai says:
‘You have to have a temperament where you’re very happy watching paint dry.’
It might sound strange. But doing nothing and sitting on your positions can actually be one of the best decisions you can make.
That doesn’t mean you should be a sloth all the time. There are times when extreme activity is necessary. Is 2018 one of those times?
Use your best advantage
Why does Mohnish believe you have to be happy with watching paint dry?
It’s probably because the largest gains come only after holding a stock for long periods of time. That’s not to say you can’t look for the small-cap ready to rocket up.
But if you think you’re going to double, triple or quadruple your money inside a month with continued success, you’re kidding yourself.
It used to be that the investor with the most information wins. He/she knows something that the market does not and can thus make better decisions.
But in 2018, everyone has access to the same information.
Companies tell investors everything they need to know (market size, competitors and future outlooks) in their annual report. If you want more information there are services like MorningStar, Bloomberg and let’s not forget trusty Google.
It’s hard to win on information only.
What you need today is information, plus something else. For most of you, that something else is time. There are some investors who don’t want to sit in stocks for weeks with no gains to show for it.
Their activity not only ruins their investment run, but also put more money in their broker’s pocket. It’s why Mohnish says his ‘only competitive advantage is patience and slightly superior analytics.’
I’m not talking about waiting a decade for one stock to payoff. You’ll find most investors aren’t even willing to wait 12 months for their positions to show signs of life.
But if you are willing to sit tight for at least 12 months, then you’ve already got a massive edge on the overactive investors that make up the market.
But like I said, there are times to be active.
A time to be active
2018 was the year markets stopped their never halting climb.
In February you saw stock markets around the world shudder. The ASX 200 fell almost 5% within two trading days.
The S&P 500 (the 500 largest US companies) drove more than 8% in seven days of trading.
A combination of US bond yields and investor sentiment sparked the decline. And that sentiment is still yet to change in 2018.
After recovering from our February blues, the ASX 200 dropped again in April.
Across the headlines are political tensions, data scandals, rising debt levels and higher interest rates. All this makes most investors want to run and hide.
But this is exactly when you should start getting active.
‘Bad news’ this year has pushed down stocks like BlueScope Steel [ASX:BSL], Costa Group Holdings [ASX:CGC] and Facebook, Inc. [NASDAQ:FB].
Yet had you been buying when others were selling, you would have seen double digit gains within months.
In an interview with Steve Forbs, Mohnish said (my emphasis):
‘…I think that the way the investment business is set up, it’s actually set up the wrong way. The correct way to set it up is to have gentlemen of leisure, who go about their leisurely tasks, and when the world is severely fearful is when they put their leisurely task aside and go to work. That would be the ideal way to set up the investment business.’
I would hesitate to call the minor bump this year a case of ‘severely fearful’ investors. However we’re bound to, at some point, see market declines of 20% or more.
And when that time comes, I hope you’re one of the few buyers among the hoard of sellers.
Editor, Money Morning
PS: It’s not always easy to navigate a constantly changing market. Factors like changing demographics, economic policies and business models are all at play. And Harry Dent, of the Boom & Bust Letter believes we could be at an inflection point. Make sure you’re prepared for what might come.