Imagine it is the year 1900. You are an investor who has a portfolio of stocks. One of them is the largest retailer in the country you reside in. The business has been gushing cash for decades, making shareholders a fortune on the way. Their pricing is excellent, because they negotiate the best price with suppliers, their locations are conveniently positioned, and the service is gracious and efficient. They sell on a national basis, and the customers are extremely pleased. Another company in your portfolio distributes medicine nationally. They manufacture it locally and ship it to pharmacies and hospitals. The company implements this business model flawlessly and is profitable for many years, increasing its margins and making shareholders, you included, very wealthy. Now, imagine that far away on another continent, a pretty large country broke away from political and economic agreements it signed with other countries. Other shareholders, through distant relatives who sent them a note on a ship traveling from that continent to yours, learn about the event within a month and come to you asking you buy their shares at 15% less than their current price. How ridiculous does that sound?
Did the spending habits of your fellow citizens (customers of these two companies you own shares of) change because of a new reality in political treaties across the ocean? Will they buy less beer or headache pills?
Our mind is divided between reason and emotions. Our willpower is superior to both of these, and it is the vehicle with which we decide if emotions or reason should dominate a given situation. This requires tremendous self-discipline and is the main reason why smart and educated people don’t always succeed at investing. Knowledge is important, but self-discipline is paramount. To succeed, one must cease to react to the market, and instead capitalize on the market.
Brexit proved once again that investors don’t practice willpower and mostly allow their deep emotions of fear and greed overwhelm them, selling in panic. I bet if we look at the public filings of the best-performing investors of our times, we would see that they capitalized on the widespread, unjust fear and low prices that followed the results of the vote by buying whatever companies were already on their watch lists and trading for a price they were willing to pay. Who doesn’t like a discount?
Some events do matter to the companies you own and their operations, and that is the only reason to consider selling – not just because market participants decide to sell their shares.
The next time we encounter a political crisis, use your willpower to ask yourself a number of questions before taking any action:
- What companies will be impacted in the long-term from this change?
- Will it hurt their competitive advantage, or will they use this to outsmart competition and gain more market share?
- How have they handled previous crises in that region?
- What companies specifically benefit from this situation? There are proven crisis hedges we wrote an entire report about, and many more questions.
Slowly, you will be able to turn to reason to guide you as a matter of habit.
The reason why so few practice self-discipline in investing is because they don’t practice in general. If you want to become an astute investor quickly, start to use your willpower in all aspects of life to direct energy to reason when needed and to emotions when they are useful. Once you master this skill, investing will become second nature.
Investing is an art reserved for those who don’t allow others to think for them.
The next time you feel an urge to do something, read Activity Disease.
Brexit-like corrections are common and natural – we would be wise to capitalize on the panic.