Dollars & Sense
Make Your Profits in Times of Turmoil
If the past five years have taught investors anything, it’s that patience and discipline matter most. On nearly a dozen occasions since 2009, investors have been induced to sell shares in a panic, often following so- called “calamitous” events that had the potential to permanently harm stock prices.
As we now know, however, the Greek debt crises, the Arab Spring, civil wars in Libya and Syria, the European banking morass, the Japan earthquake, the U. S. debt showdowns and the current Ukrainian emergency have done little to slow the sales of companies or impair their valuations.
Unfortunately, those who reacted to any, or several, of these events now live with portfolio performance below their expectations. With investors again being put on alert due to events in Crimea, we offer our prescription for countering this incessant news cycle.
Your time horizon should dictate your response. Investors who strive to be long- term oriented hurt themselves reacting to short- term events. Always try to put the news in the context of your holding period. Traders must respond to all news that may move their stocks and cause a reversal of trend, whether it’s a weather event, a strike, a geopolitical occurrence, an economic data point or a slight shift in monetary policy. You don’t. Investors who desire to hold their stocks for years need to focus on issues that impact the long- term growth of the companies they hold, such as productline development, profit margins, the strength of management, capital allocation and competitive advantages. Don’t mix your reasons for buying and selling.
The market discounts shocking news events very quickly and moves on. After the Sept. 11, 2001 attacks, stock prices swooned for five days, losing 11.6 percent, but climbed back to their preattack highs by mid- October. When the first Gulf War began in January 1991, stock prices bottomed the day of the coalition invasion, and within six weeks had risen nearly 21 percent. The 2011 earthquake that damaged or destroyed nearly 1.1 million buildings in Japan, caused a nuclear power plant meltdown and elicited doomsday predictions from the media, prompted just a three- day sell- off on Wall Street that was fully erased within days.
Once the stock market discounts the news shock, it tends to resume the underlying trend. Events such as the Russian annexation of Crimea tend to be viewed as “sideshows to the big show,’’ a distraction that temporarily directs traders’ attention away from the more- prominent issues of the day, in this case, GDP growth, corporate earnings and the trend of interest- rates.
The media will certainly over- hype all news events these days. Watch The Weather Channel for just a few days, and it will seem like atmospheric calamities are occurring with alarming frequency. In reality, hurricanes, tornadoes, droughts, mudslides, wildfires and floods occur around the world just as often today as in the past, according to property and casualty insurers. The difference is, these events now are televised 24/ 7, and the coverage feeds right into an industry that needs to induce you to trade.
You make your best profits in times of turmoil. You just don’t realize it at the time. Conversely, you make your worst mistakes being enticed, for the wrong reasons, to sell your shares at cheap prices.