Eight pearls of investment wisdom for these volatile times

#1 Volatility is not something to fear, but something to embrace

Why do we fear stock market volatility so
much? As an airplane’s wings must bend during
turbulence to prevent them from snapping, so too
must shares fluctuate, sometimes gently, other
times wildly. Of course, severe turbulence during
a flight can be an uncomfortable experience but
we have no choice but to sit tight, knowing deep
down that we’ll reach our destination. But in the
world of investing there is little to stop us bailing
out at the slightest wobble as our emotions get
the better of us. Try then to welcome volatility.
Shares do not go up without it.

#2 Think long term

All stock price movements are a combination
of unpredictable noise on the one hand and the
meaningful pattern of business performance on
the other. Over short periods price movements are
as good as random, while over long ones business
performance dominates. As an investor, you should
align your time horizons accordingly. If a factory,
for example, is expected to provide at least ten
years of returns, so should your shares.

#3 Know the difference between gambling and investing

We all like to have fun once in awhile. A trip to the
casino is an excuse for a good time, but approach
the stock market in the same way and you’ll
quickly find yourself in trouble. Successful investing
is hard and often dull, requiring discipline and
lots of study. For that adrenaline rush, few things
beat watching the roulette wheel spinning. When
it comes to making good investment returns,
however, owning the casino itself tends to be
more profitable than entering it. Think about it.

#4 Be contrarian

We have a tendency to do or believe something
just because others do. It makes us feel normal,
part of the group. Occasionally, however,
such behaviour is counterproductive and even
dangerous. Rush for the exit in a crowded market
with everyone else and you risk getting trampled.
The same applies to behaviour in the stock market.
Selling – or buying – behind everyone else is a sure
formula for poor investment performance. Warren
Buffett teaches us to “be fearful when others are
greedy and greedy only when others are fearful.”1

#5 Consider the difference between price and value

In the real world, the distinction between price
and value is frequently apparent. Given the choice
between a $10,000 car and a $10,000 tee shirt,
it’s pretty clear that the car is better value. In
the investing world however, it is much harder
to discern the difference. Unlike a car, whose
economic utility is something we can understand
and even evaluate, the value of a company is
somewhat intangible and thus a tricky concept to
grasp. Guru stock picker Philip Fisher noted that the
stock market is filled with individuals who know the
price of everything, but the value of nothing.2

#6 Be humble, the stock market is smarter than you

Overconfidence might help to secure a job
promotion or the attention of others at a nightclub,
but in the investing world, an over-inflated opinion
of yourself can be disastrous. You may think that
you are in a position to predict the direction of
the market or a particular stock over the next few
months but remember that there are millions of
others doing the same thing. Apply a little humility
and ask yourself honestly whether you are really
smarter than all of them. As the father of modern
economics and successful investor John Maynard
Keynes noted, “Successful investing is anticipating
the anticipations of others.”3

#7 Avoid things you do not understand

The world is an increasingly complex place and
one often finds oneself blinded by science or
confused by complicated arguments. With
investing, it is important to understand precisely
what you are buying, at least so that you can
sleep soundly at night. Think about shares as
you would a book: if you don’t understand it,
put it down. Peter Lynch recommended that if
you cannot summarise in just a few sentences
why you’re investing in a company, then you’re
probably looking at too much information.4

#8 And finally…

If you place bets proportional to their market odds
on every horse in a race, you’ll come out slightly
down, after the track’s take. This is a pointless
strategy, particularly if you know more than others
about horses. It is important to understand where
you have an edge and, when you have one, to use
it to your full advantage. We never forget Buffett’s
tip, “Wide diversification is only required when
investors do not understand what they are doing.”5

1 Warren Buffett, Chairman’s letter (2004) to shareholders
2 Philip A. Fisher, Common Stocks and Uncommon Profits (1958)
3 Isms (2006) by Gregory Bergman
4 Morgan Housel, Keep It Simple, Fool (2008)
5 James Altucher, Trade Like Warren Buffett (2005)

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