By Scott Reed
Don’t just do something – stand there!” It’s the opposite of what your mother said to you while you were growing up. That’s why I had to read it twice before I got the point in an article I read recently. I do not credit this play on words to my personal wit. However, since I can’t find the article to give proper credit to the author that thought of it, I hope he or she will forgive me.
Our society likes to act after the fact. We love to set up a night watch in our neighborhoods after a house has been robbed. We slow down after we get a speeding ticket. We buy flood, hurricane, wind and fire insurance after we have had a hurricane or our house has burned.
We have a hard time addressing problems before the crisis. Just look at Social Security. Better to wait for a miracle and pray for divine intervention.
It’s much easier to address tough issues when we can see the damage that can be done. We beef up security after an incident, rarely before one.
Just standing there is one of the hardest parts of becoming a world-class investor. You have to constantly do things that ARE right but don’t FEEL right. Lord Byron said, “Buy when there is blood in the streets.” Yet few people felt like buying stocks when the Dow reached 6,400 in 2008. Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.” That quote tells you that most people get it wrong. Most people do what feels right, which is often times not what IS right.
Since I have been in this business, there have been 11 bear markets, depending on how you define a bear market. The one in March 2000 became the second-worst in history by the time it bottomed. In November 2007, another bear market eclipsed the one in 2000 and was combined with a full-fledged credit crisis to make matters worse.
You would think that the smart investors would do SOMETHING in the midst of all that turmoil. The problem with taking action in the midst of turmoil is that you have to make at least two correct decisions: When do you get out of the market and when do you get back in? Those are not easy decisions to make and most of the investors I have watched have failed to convert that double play. The tendency is to get out when the market is low and get back in the market when it has come back up. That’s the feel-good thing to do and it can have terrible consequences for your portfolio.
I am not here to tell you that holding onto your investment plan when the market is tumbling is the best thing to do. Obviously, the best thing to do is to sell at the top and buy at the bottom. I am telling you that holding onto a good, solid investment plan during market turmoil gives you the best probability of a positive, long-term outcome.
I played golf last weekend. As I considered my approach shot to the green on one hole, I remember thinking, “My best possible outcome would be if I could hit my seven-iron over the water, carry the left-side bunker to the smallest part of the green and have my ball check up very quickly.” That was my best possible outcome, and I can hit that shot probably once out of a few hundred tries. If I tried the shot and failed, which was a huge probability, it could easily cost me two or three strokes. It’s one thing to take that risk on a Sunday afternoon with nothing on the line. It’s a whole different outcome when failing costs you two or three more years of work instead of two or three strokes.
Develop your own investment policy and stick with it. Make changes, if needed, as you change – not as your investments change. You’ll be better off in the long run.
Scott Reed, is CEO of Hardy Reed Capital Advisors in Tupelo. Contact him at (662) 823-4722 or firstname.lastname@example.org.