Patience is a Virtue
Patience is a virtue, and it is one of the traits necessary for success in financial markets. Perusing today’s headlines reminds us why patience is so important. This morning alone offered several grim news items.
AT&T will cut 12,000 jobs, DuPont 2,500. The European Central Bank cut interest rates 0.75 percent and the Swedish bankers slashed a whopping 2 percent. Retailers reported large sales declines in November, with many losing more than 10 percent of their sales from last year. Once again, Wal-Mart was a notable exception, but the company’s recent success underlines the economic story unfolding before us. The Big Three automakers are headed back to Washington to beg for taxpayer dollars, while factory orders had their biggest drop in eight years.
Everyday we come closer to reaching a stock market and an economic bottom, but the date is unknowable. Economic activity will slow further next year, and headlines will become increasingly negative. Unemployment will rise, perhaps back to or even above the 10 percent levels seen in the early 1980s. Stocks are already selling at low valuations, but now is the time for patient dollar cost averaging, not a bottom-fishing expedition. The best approach for passive investors, especially in this holiday season, is to turn off the news and focus on friends and family. But if you must keep abreast of developments, do so with the understanding that the worse the headlines get, the closer the bottom will be. A recession is a process, and every painful step must be taken in turn or we risk another unsustainable recovery.
Furthermore, the stock market recovery will already be underway even as the headlines declare more economic pain is in store. Unemployment will continue rising after the economy begins to recover. For this reason, headline watching can be hazardous to one’s financial health. By watching daily changes, an investor may train himself to expect the economy to deteriorate ad infinitum, or conversely, the optimist may regard every major negative item as a sign of the bottom.
The best approach is to be the hedgehog, not the fox, as described in Isaiah Berlin’s famous essay. The fox, the astute headline watcher, knows many things. The hedgehog, on the other hand, knows one big thing. The hedgehogs are the passive investors, such as Warren Buffett, for whom daily news doesn’t offer much news. November 2008 retail sales, after all, are just 1 of 120 monthly sales figures to be released in the next decade, and who didn’t expect they would be bad? For a trader who buys today and sells next month, the number could be vital, but for someone investing for the long-term, it is one data point that makes up a much larger trend.
Don’t substitute short-term panic for long-term planning. If you find yourself unable to avoid emotional investing decisions, please call Dion Money Management at 1-877-850-7942, ext. 191 to either speak to me or one of our portfolio strategists, and we can devise a disciplined strategy for recovery.
