August 12, 2010
Earnings season is wrapping up for the second quarter of 2010. There have been many bright spots, most recently Macy's, Nestle, and Disney. The market has rewarded those companies that have done well and expressed cautiously optimistic views on the future. However, a survey of the headlines would leave you wondering how a company could do well in such a horrible environment. For example, the Wall Street Journal's lead story is "Stocks Drop Sharply On Economic Fears"; PIMCO's famed Bill Gross is warning of deflation; Fortune is talking about joblessness everywhere, etc. These negative headlines represent the perennial pessimism that is the news business. The financial press is no exception.
There is however a disconnect between the financial press, their prognosticators and the companies that are actually doing business on the ground. But unless you have perfect faith in the future, it's hard for the individual investor to not be distracted by negative press. In a perfect world these headlines would be viewed in their proper context or, in other words, with a large grain of salt. For the biggest threat to investing success is investors themselves; they consistently make the wrong decision at the right time. The constant flow of negative news ingloriously feeds into this major problem.
Most investors rely on an imperfect faith that investing will reward them, which causes them to focus too much on the short term. The headlines of the day give expression to fears that rarely happen but frequently cause imprudent decisions. It's difficult to not make reactionary decisions when faced with an endless stream of negativity. It's difficult not to lose faith and sell out. That is why investors routinely underperform the investments that they own. In fact, the average mutual fund investors underperforms the mutual funds they own by almost 50% over any ten year period. They simply lose faith and sell at the wrong time. Just think back to March of 2009, when equity mutual fund outflows peaked. Who knew the markets would go on to a history making rebound? It was the exact wrong time.
Over the past week I watched three different shows on CNBC. There was not one bit of information that I heard with any redeeming value that could help an investor be successful. It was all a distraction. Not once did anyone discuss an approach that would lend itself to long-term investing success. It was all about trading, intra-day volatility, what the S&P will finish the year at, and other mindless drivel.
The fact of the matter is that no one knows what will happen over the short to intermediate term. No one can consistently predict the markets. I cannot and neither can you. And thank heavens for that because it means all of the doom and gloom pervading the financial press is worthless. If the financial press were all roses it would be just as worthless. Do yourselves a favor, do your portfolio a favor, do your future a favor and never make a decision based on short-term considerations. Doing so can never be a good decision; it can only be lucky and the odds are steeply against you.
I don't meant to be discouraging because I fervently believe there is a light at the end of the tunnel. We can be optimistic about long-term investing success because history teaches us that we can be. We've certainly been through worse (World Wars, The Great Depression, Cold War, etc.). We've always come out ahead if given enough time. Time is the most valuable asset an investor has because most of the time, time is all you need. There are very good reasons to be optimistic about the 21st century. You can invest because the future is full of potential that we can't possibly imagine. Don't let yourself be distracted. Look down the road to where we are going to be and don't be distracted by the headlines of the day. If you can do that, and stay out of your own way, you will give yourself the best chance there is at investing success.
Brennan R. Redmond
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).