Learn to be a happy investor in four easy lessons
If you were not surprised by the markets in 2021, you were not paying attention. At the start of 2021 nobody expected a second consecutive year of great stock market gains. Nobody expected record low unemployment, or rising (and still rising) housing prices, or that inflation would increase at rates not seen in thirty or more years. We at Baskin Wealth Management were as surprised as everyone else; pleasantly so, in this case, but we know that not all surprises are nice ones. As I settle into my new role as Chairman of Baskin Wealth Management, I would like to share four lessons I have learned from my thirty years as a professional investor. I think they can help to make you a happier, more confident, and more successful investor.
- Accept uncertainty
A story is told about a little girl who loved going to religious school. When her mother asked her why, she said “It’s great! You never know what God is going to do next!” Few of us will ever embrace uncertainty with that level of enthusiasm, but we would do well to accept that nobody knows what is going to happen next. Not tomorrow, not next week, and certainly not next year. We can comfort ourselves by reading the forecasts of learned analysts; but the world is complex, events are random and people are unpredictable. In short, the future is uncertain. This lack of certainty should not prevent us from acting, however. Rather than being paralyzed, we should train ourselves to think of our actions as having a range of possible outcomes. What we can do, indeed must do, is take actions that are more likely to have favourable outcomes than unfavourable ones. We know that not everything we do will work out, because we cannot know the future. We can, however, examine the past and learn from it. The future does not repeat itself, as it is said, but it rhymes. What worked yesterday may well work tomorrow; but it may not. Accept the world as it is, uncertainties and all.
- Embrace volatility
A famous investment parable: A man is walking with his dog from the south-west corner of a large park towards his car parked in the north-east corner. The dog wants to visit every tree, sniff every dog that approaches and do everything but walk in a straight line. If plotted on a map, the course of the man and the dog is full of turns, changes in directions and squiggles. Nonetheless, eventually they reach the correct corner of the park.
That is how the stock market works. The trend over time is relentlessly from the bottom left of the graph towards the top right, but there are a lot of deviations along the way. Volatility is inherent in the markets, as it reflects changes in the opinions of investors, economic factors and any number of other things including the weather and the prevalence of disease. However, while the direction in the short term is uncertain, there is little or no doubt about the direction in the long run. Volatility gives us the opportunity to sell at market highs and buy at market lows. It allows smart (and lucky) investors to do better than the market average, or worse if they are neither smart nor lucky. Volatility ebbs and flows in intensity, but it never disappears. We should view it as our friend.
- Learn patience
As a young man, the future Prime Minister of Vietnam, Ho Chi Minh, attended the Versailles Peace Conference at the end of the first World War. He was asked what he thought about the French Revolution, 130 years previously. He pondered for a moment and then said: “Too soon to tell”. He went on to spend the next 50 years, until his death, fighting for Vietnamese independence. Few of us can expect to achieve that level of patience.
Sometimes something seems so obvious, so self-evident, that we are baffled that not everyone sees it exactly as we do. Surely this company is poised for success; this stock is greatly over-valued (or under-valued); this CEO is hugely over-rated. The new discipline of behavioural economics has a lot to say about how we fool ourselves, persuade ourselves, when faced with difficult decisions. A host of cognitive errors clouds our judgement and often leads to bad decisions with bad outcomes. Most behaviouralists tell us that it is very hard, maybe impossible, to eliminate all of these thinking errors, and they may be right. But there is one remedy that works wonders: patience. Simply taking the time to see what happens next; to gather more evidence; to see how the world plays out, can work wonders.
Most of our impulses fight against this, most prominently what is now widely known as FOMO, fear of missing out. The market for Initial Public Offerings (IPOs), for example, plays on FOMO. Who would not want to buy the next Tesla at a fraction of its eventual price? But new stocks have no track record. There is nothing to analyse. The patient investor knows that about 80% of new offerings end up trading below their initial offering prices. There will be lots of time to pick and choose among the new offerings once more is known.
Similarly, we sometimes buy a stock only to see it wallow in a seemingly endless pattern of small ups and downs, never showing much direction, or giving reason for encouragement. Experience has taught us that so long as the factors that led us to buy the stock in the first place have not changed, our opinion should not change either. Eventually, the market will likely agree with us. It just takes some patience to wait for it.
- Avoid greed
Frequently clients call us up when we have sold some of their favourite stock. “Why did you sell some of my Microsoft”, they ask, “it’s wonderful and keeps going up”. We explain that disciplined investors do not let one stock get too big (overweight), lest it increase risk for the whole portfolio. We balance safety and risk and try to avoid being greedy. An old Wall Street saying has it that sometimes the bulls win, sometimes the bears win, but the pigs only get slaughtered. We have seen this play out during 2021. Many of the very trendy names that went to the moon have ended up costing investors a ton of money. Lots of early shareholders, for example, made money on cannabis stocks, but those who bought into later market offerings, or got greedy and held on too long, have been massacred (Canopy Growth is down 85% from its all time high, Tilray is down 97.5%). Analysis of value is just as important when owning a stock as it is when buying it for the first time. Learning to let our reason overcome our emotion is one of the hardest, but most important, lessons in investing. When we take some of our money off the table to reduce risk, we are leaning against our greedy impulse. Usually, it turns out to be a smart move.
We hope for a better 2022, a healthier year and a return to normalcy. We do not know what will happen in the markets, but you can be sure that we will be paying attention. On behalf of all of us at Baskin Wealth Management, I wish you and your families a happy, and especially, a healthy 2022.
David Baskin, Chairman
Barry Schwartz on BNN – December 14, 2021
- We have 99 problems but the economy is not one of them
- “There is no alternative but to own equities”