The tide is out...
DIS and DAT
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
The tide is out...
“It’s only when the tide goes out that you learn who’s been swimming naked.”
Today, we find ourselves witnessing a significant economic event. As I type this, the S and P 500 has reached “bear market territory,” meaning that from its highest point, stock prices have dropped more than 20%.
For many, this may be an unprecedented and perhaps even tumultuous, scary event. I have found comfort in the words of two great investors, whose ideologies offer insight and comfort to the everyday investor. These men are neither great speculators nor gamblers. Instead, they are great investors because while they could not predict timing (and didn’t try to do so), they knew that this type of event would one day occur. Rather than scramble or fret, they’ve prepared themselves mentally to hold the valuable companies they own through such times, and that has separated these two from most of the other participants.
The first is Warren Buffett; the second, Peter Lynch.
When watching the stock market activity, spotting “the gamblers” is not so simple as just looking at the flashing neon sign out front that reads “casino.” It takes time, experience, and learning to distinguish between that speculative action and those of a level-headed and strategic investor. Learning that distinction, though, is vital. In this piece, I will focus not on the drop in stock prices, but the ending of the speculative phase of the market cycle.
What does “the tide going out” mean to me? Just as the waves recede from the shore, this is a natural and expected part of the investment cycle. The reality is that almost everything has seen a recent price drop from treasuries to NFT’s and crypto’s. It is a signal, and as far as I am concerned unavoidable. Another way of saying Buffett’s’ famous quote may help to understand what just occurred in the markets:
“only when the tide goes out do you discover who has been swimming in momentum.”
― Gautum Baid “The Joys of Compounding”
The ending of this speculative phase, though, means some will have permanent loses of hard-earned capital – real, permanent, total losses. They will have to begin from zero. As investors this is the kind of restart we aim to avoid.
As investors wearing swimming trunks is avoiding speculative, gambling, and momentum investing. We want to wear trunks because we know the tide goes out, and we know we can not predict when. If we cannot predict when and we join the crowd in chasing price momentum (or shedding our swimsuits, as it were) we invite embarrassment and risk starting from zero.
“A decline in stocks is not a surprising event, it’s a recurring event—as normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you don’t think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside. A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it’s coming, and you’re ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.”
One way to avoid the temptations of joining the crowd is to focus on creating an “Investment environment”. A good investment environment should help to fight off the pied pipers of speculation and gambling from affecting our thoughts and actions. To help in that area we have shared 7 reminders for creating an investment mindset.
One of our 7 reminders about having an investment mindset is that we are not seeking outperformance of all investments at all times. If a popular momentum-driven pricing environment in any area of investments occurs, underperformance of that area is expected (we don’t like swimming without our trunks no matter how popular).
This reminder is necessary for those times when speculative market behavior is rampant. We must at least remember that it is not necessary to behave in a speculative or gambling way to achieve investment results.
Business performance is linked to investment results
Instead of predicting price performance, market events, political events, or new turns in the economy, the investor seeks to share in the profits of the business over the long term by holding the shares. Since avoiding price drops outright is, by my take, impossible, finding and buying ownership in businesses that can weather these storms is crucial to the longevity of your portfolio.
“More money has been lost trying to anticipate and protect from corrections than actually in them.”
― Peter Lynch
Seasons do change. Whether it is at the beach in the hot summer or up north in frigid winter, selecting the right clothing for the season is as important in capital allocation as it is in life. Just as you pull your coat from the closet once the temperature drops, so too should you calmly and pragmatically react to such changes in the economic climate. We believe this approach is what good investors do when they allocate capital.
Thanks for your attention, I hope this helps, and please be safe,
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