Confused and Scared?
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
April 2023
Confused and Scared?
“Anyone who isn’t confused really doesn’t understand the situation.”
- Edward E Murrow
Recent bank failures inevitably bring back memories of the great financial crisis around 2008. Now, as then, such failures are only one of a multitude of tumultuous historical events. A former United States President faces criminal charges amidst his ongoing political campaign. A war rages in Ukraine with Russia, and the Chinese leader seeks to make peace there. Everywhere you turn, some news of doom and gloom will spin your head.
I cannot help you to make sense of world events. And even though Twitter, Facebook, your neighbor, the news, and everyone in between will try to convince you that they can, they won’t make things any less confusing either. Instead, I want to focus on what we can make sense of: keeping an investor mindset. Because, well, the more things change, the more they stay the same.
For now, I’d like to help refocus on investments by discussing avoidance: what it is, what to avoid, and why it will help you feel confident in your investment decisions.
Avoidance as a Risk-reduction Strategy
“It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
- Charlie Munger
We believe that large discrepancies between value and price of large cap U.S. stocks are difficult to locate. This reality means you may be likely to find that the market knows more than you do, so to speak. Because the market knows more than you, errors are easily made. This is why avoiding stupidity can be profitable. I’ll share a few areas in investing where the avoidance mindset can be beneficial.
Behavioral: As you are aware, we seek to invest, not gamble or speculate. Much of the news scaring and confusing us is based on speculation. Remember this, and avoid any advice that would depend on you making a gamble rather than an informed and calculated decision where to put your investment.
Analysis: When it comes to investing, being the smartest person in the room isn’t the most important thing. More important is avoiding placing money into things you do not understand and cannot analyze. Recognizing and accepting where you have gaps in knowledge is crucial to choosing your investments with care.
Environment: Be choosy about where you get your investment advice. Your social media feed will not make you a better investor; it will only serve as confirmation bias that certain investments “can’t lose,” regardless of how strong those investments may be. Avoid investing based on thirdhand knowledge and gathering a consensus.
Time Frame: Investing requires patience, no doubt about it. There are very few times when an investment is a quick in-and-out way to get rich. A company simply cannot compound earnings over a one-year period. The “magic” of investing only arrives when you find and hold a company that has and can continue to compound earnings.
Fad strategies posing as investment strategy
You can also improve your results by avoiding investment schemes that are, in fact, not proven strategies. These faux strategies may work for a while…until they don’t and implode. Distinguishing between what’s real and what’s not can be extremely difficult to distinguish, but if this were easy then everyone would be rich.
Here are some “strategies” you’d do best to avoid.
ESG: I know this is a controversial one right now. I don’t think it’s an investment strategy; at the same time, I was ESG before ESG was cool. In my second ever Dis and Dat, I hypothesized about how I thought America would get out of the great financial crisis of 2009 (Dis and Dat - Change is in the Air - April 2009 | Advisor.Investments , Boy, 14 years ago…I am getting old.) In that newsletter I describe the need to balance multiple stakeholders in order to have a great corporation. My belief of why ESG is not an investment strategy is because it is leaving off some of the stakeholders in its attempt to “invest.” This imbalance makes for a short term oriented corporation and not a true investment strategy.
LONG-TERM U.S. Treasuries: CPI (inflation gauge) recently tipped down from a recent high of 9.1% annualized to 6%. 30-year treasuries yield 3.5% before taxes. This is not an investment strategy because it requires you to assume that inflation drops quickly and is a permanent drop.
FED Guessing: Not even the Federal Reserve can accurately predict their own future actions. How are investors going to be able to predict the moves? And then to be profitable, you would have to also predict the other market participants’ predictions of the predictions. You may even have to predict the predictions of the predictions of the FED predictions. All this guessing disqualifies this as an investment strategy. The same goes for strategies based on world events, politics, wars, etc. They are usually more useful as marketing tools, not investing tools. Attempting to be a hero by predicting some outlandish event or some hot new startup should be avoided.
Efficient Market Hypothesis: We do not believe that a strategy based on historical price movements is an investment strategy. First, you cannot gather price data on all available investments. It’s convenient to leave education out of the mix, as just one example of why that hypothetical efficient frontier line is impossible to calculate. Most recently the theory has been an easy marketing strategy to wind up with a portfolio allocation of nearly 60% U.S. stock funds and 40% bond funds. After 2022, though, more people than just me are questioning the validity of this as an investment strategy.
It really is difficult to surpass the concept of discounting future cash flows as an investment analysis process. To build a portfolio requires more wisdom than attempting to follow that concept, but it remains one surefire way to distinguish genuine investment strategy from fad strategy. It is boring and hard work, but reasoning out that process can improve results.
Make no mistake: we are confused and scared too, but by avoiding those strategies which would detract from our investment success, we’re working to be consistently not stupid, and that brings some comfort.
Thanks for your attention, I hope this helps, and please be safe,
James
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