As we close out the first-quarter’s earnings season, many blue-chip companies appear to have managed the COVID-19 crisis reasonably well, all things considered. Of course, nobody can reliably forecast for how long and to what degree the virus will continue to decimate the economy.
Nonetheless, given the recent decline in share prices across the board, it would seem logical that now is when you want to add strong corporate performers, i.e., those with both a strong product offering and the strength to weather any economic downturn while at the same time garnering attractive profits in the months and years ahead.
So, what could go wrong? Why would you not take advantage of the lower prices? Basically, it is a lack of self-control and patience. While they are great virtues, they run contrary to human nature.
Since 1928, there have been 20 periods of a 20%-or-more market decline. The market increased nearly 100-fold during this period, or 140-fold with dividends and inflation factored in.
Consider that during a period when people made 140 times their money in real terms, they saw at least one-fifth of their wealth melt away 20 times, or once every 4.5 years. Even if you limit it to the post-World War II period, major declines occur about once a decade.
What is the real difference between patient investors with a buy-and-hold philosophy and their counterparts? The answer is that patient investors view volatility like the flu, an event that is not pleasant but one which you most likely must occasionally endure. Neither event portends the end of life as you know it.
Advice for a volatile market is much the same as the flu. Drink some water. Take a nap. Wait it out. Life will go on ... and you will be healthy, again, both physically and investment-wise.
Want a more quantitative answer. Several years ago, two finance professors, Brad Barber and Terrance Odean, undertook a study titled, “The Common Stock Investment Performance of Individual Investors.”
The study vindicated what Benjamin Graham wrote 50 years ago, “The investor’s chief problem — and even his worst enemy — is likely to be his or herself.”
Academic research has determined that investors who trade frequently earned a return well below that of those who held long-term. According to Barber and Odean, the average household would typically hold a stock for 15 months. Active traders held stocks on average for about 120 days.
In two other papers, “Do Investors Trade Too Much?” and “Are Investors Reluctant to Realize Their Losses,” Odean discovered that when investors decide to sell shares, the stocks they buy “actually underperform those they sell.”
People who trade frequently often make poor investment decisions. Why? Odean’s research indicates that investors are especially prone to sell a stock that has declined in the past and then suddenly posts a small gain.
Individuals often hold on to losers because they feel they have not locked in a loss, while reciting the mantra, “there is still hope.”
Odean speculated that another reason was the ease of buying and selling over the Internet. The authors’ research also postulates strong evidence that, “There is a tendency for human beings to be overconfident.”
Investors often believe they can time the market when the weight of the evidence shows otherwise.
“In an up market,” Odean wrote, “you’re going to think, I’m a good investor, a really good investor.” They feel that is true, he said, even if a portfolio returned 10% in a year in which the Standard & Poor’s 500-stock index gained 20%.
Therefore, brimming with self-confidence, investors are more likely to believe they can jump out of one stock and into another at precisely the right moment and make a killing.
The answer to all this is simply not to make high turnover an investment option. And in the process, you will find yourself much less concerned about short-term market trends or the business cycle.
Lauren Rudd is president of Rudd International, an asset management firm. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns, go to heraldtribune.com/business/columns. Lauren Rudd offers commentary Thursdays on SNN News 6 during the 5:30 p.m. live newscast.
"accept" - Google News
May 08, 2020 at 04:56AM
https://ift.tt/2LdBx8g
LAUREN RUDD: Confident investors accept stock market volatility - Sarasota Herald-Tribune
"accept" - Google News
https://ift.tt/2YsXkRf
https://ift.tt/3d2Wjnc
Bagikan Berita Ini
0 Response to "LAUREN RUDD: Confident investors accept stock market volatility - Sarasota Herald-Tribune"
Post a Comment