Finance Investing in stocks? Focus on the business, not the market Part of what makes equity investing so challenging is that every stock is a combination of a business and a financial instrument. On one level, every stock represents an ownership share in an underlying business; the value of that ownership share will fluctuate over time with the successes (and sometimes failures) of that underlying business. But every stock is also a financial instrument that will fluctuate over time with the (often irrational) emotions, perceptions and beliefs of millions of other investors, analysts, pundits and commentators out there in market-land. Veteran investors, who have a good sense of when the emotions and opinions of the broad investment public become divorced from the logic of a given business, can use these emotional reactions to pick up exceptional businesses at exceptional prices. But in a bear market, it’s usually a lot easier (and a lot safer) to simply filter out this emotional “noise” and keep laser-focused on the underlying business data of a given stock. By doing so, you keep your attention on information that is known, measurable and somewhat predictable (business earnings), rather than worrying about what remains unpredictable, capricious, and largely outside of your control (market sentiment). So, if you’re interested in investing in stocks during the bear market, start by asking yourself some fundamental business questions: how is the company doing in a challenging economy? How much debt does it have – is it vulnerable if interest rates rise? How much cash is coming through the door, and will that cash continue to come through the door during a recession? Once again, none of these questions is groundbreakingly new, nor do they require a PhD in finance to understand. But they remain the foundation of most successful investing, particularly during times of market turmoil. Ditch the “timing the bottom” mentality During a bear market, a lot of individual investors define success as timing the bottom: waiting for the exact moment at which the bear market reaches its nadir, and then going “all in” when they can pick up stocks, bonds and other investments at ultra-low prices. And we agree that such a strategy can be an excellent way to make money – IF you can manage to find a way to predict exactly when the bottom will happen (if you do, make sure to tell us and we can all get rich together!). Perhaps you’ve heard the saying: “perfect is the enemy of great.” It’s a good thought to keep in mind in bear markets. Many times, investors who keep on waiting for the “perfect” time to invest suffer from a strange kind of paralysis, missing out on the explosive gains that can often happen when markets snap back unexpectedly. Or, to put it another way, by obsessing about perfect timing, investors miss out on great opportunities. Interestingly, professional investors and portfolio managers rarely concern themselves with getting their timing absolutely right during a bear market. Sure, they pay attention to economic trends andmarket movements, and hold off on making big bets in times of extreme volatility. But, with the exception of high-flying momentum traders, most professionals are content to get their timing broadly right. By refusing to worry about timing, they have more “mental space” in which to pay attention to issues and topics that are ultimately much more important when it comes to determining long-term investment success: the underlying thesis of their investment ideas, for example, or the business fundamentals of the companies which they’re interested in. Shifting your thinking about timing leads naturally to a very simple, very practical strategy for bear market investing: dollar-cost averaging. Instead of waiting to go all in when the timing is perfect, you make purchases in tranches and build up your position over time. No, it’s not a new strategy. Nor is it especially complicated or difficult to implement. But it’s the one approach that nearly every successful investor (professional and amateur alike) has used to build wealth in challenging times. 40 | www.snowbirds.org
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