Four Simple Lessons to Beat Fear and Greed
Friday, December 7, 2007 | Teeka TiwariRating:
Editor's Note: Teeka is unavailable this morning, as he is making another appearance on the Fox Business Channel. The below piece, originally published this past Summer, is as timely today as it was several months ago. Indeed, up-and-down markets like we're experiencing right now make it especially difficult for most investors to remain disciplined, which is Teeka's stock in trade. Enjoy!
I have written in the past that the predictable cyclical nature of the stock market is almost comical. The headlines today have me rolling in stitches ...
“SUBPRIME CREDIT WOES GO GLOBAL”
“GLOBAL CREDIT CRUNCH IMMINENT”
Hahahahahaha, sell some more newspapers/page views why don’t you!
Many, many sectors are already vastly oversold, and some may become even more oversold. BUT you must remember that, paradoxically, the lowest risk time to buy stocks is when they are universally hated.
You must shed yourself of the notion that you will buy at the bottom and sell at the top. That’s an impossible standard to shoot for. I use periods of weakness like these to add to my long-term positions as well as to initiate new positions in very oversold sectors.
I have learned that to beat the average market return, you must buy stocks when they are at the bottom of their trading range, not the top.
Bloody simple, right? You would think so.
Fear and greed are our enemies here. In bear markets, fear grips us as we only see prices going lower. In bull markets, greed tells us they must go nowhere but higher. Both emotions rob us of our own reasoning functions, and that ultimately costs us money.
So what is the solution?
1. Get some perspective; become a student of market history.
The US stock market has been around for more than 200 years. Through war, famine and strife it has survived. It will outlive you, me, and all of our generations to come. The financial world isn’t coming to an end any time soon.
This knowledge alone, though ultimately simple, should provide you endless courage in our global financial future.
2. Use investment vehicles that cannot go to zero and that provide diversification.
We write The Tycoon Report for everyday people, not free wheeling Wall Street pros. So that means be smart, diversify. The bulk of your investment dollars should be in diversified financial instruments such as mutual funds and ETFs.
It's no secret that I am a big fan of ETFs and have my own ETF program. Even if I did not have such a program, I would still be pounding the table on individual ownership of ETFs. They allow individuals to play entire sectors for a fraction of the cost of most mutual funds.
3. Do not overinvest
People who bet it all on black usually end up in the red. Bulls make money, bears make money, but hogs get slaughtered. Don’t be a hog. That’s right. I said it. DON’T BE A HOG. You must apply a strict discipline of cash allocation to each investment.
I have one of the best track records in the entire investment newsletter world, with an average win ratio of about 77%. That means I am right 77% of the time. It also means that I am wrong 23% of the time. What happens if I overload into one idea, and it's one of the 23% ideas?
I’m straight out of luck, that’s what happens. You must pace your investments evenly in order to generate even annual rates of returns.
4. Lengthen your time horizons; learn to think in months and years instead of minutes and days.
It's OK to generate wealth over time. Growing up poor in the UK foster care system, I remember how I longed to be rich. During my formative years on Wall Street, I made the mistake of wanting to be rich RIGHT NOW! That kind of wealth can happen, but it is typically very fleeting.
As much money as I have made over the years, I would have made MUCH, MUCH, MUCH more had I just been more patient in my earlier years. This is a lesson that has revealed itself to me as I have gotten older.
Over the years, I have learned to trust in the awesome wealth-creating power inherent in a multi-decade macro earnings wave. My hope is that you will, too.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
