The Jazz of Investing

Frankly, it’s a fool’s errand to try and decide when is a good time to buy or sell equities based on movements in the stock market. Yes, valuations appear stretched and the recent, relentless upward trend in most market indexes would argue for caution. But this same comment could have been made repeatedly since the market bottom in 2009. A tired old quote is worth a revisit, “The market can remain irrational longer than you can remain solvent.” Or, put more bluntly, nobody has any real insight into what the market is going to do next. The only sensible choice is always to stick with your original investment plan. And if you don’t have a plan, then don’t do anything until you commit to one.

Almost a decade ago Lewis Sanders of investment firm AllianceBernstein made an intriguing observation, “The principal dynamics in the world’s capital markets revolve around a tug-of-war between feeling secure and making money. In the end, the feelings generally win out.” Around the same time a hedge fund manager (whose name is not in my notes) said in a Bloomberg interview that his only trades consistently making money were the painful ones. Buying stocks that are out of favor, avoiding the “hot investments” of the moment and having a plan that you stick with is not just difficult, but is indeed painful.

Looking back to 2000 there were many competent fund managers and investment professionals who underperformed the market during the dot-com bubble. Warren Buffett in particular came under withering criticism for being too old to understand the value of technology stocks. Yet it was the investors, like Buffett, that stuck to what they knew and had the discipline to execute on their strategies, even in the face of public ridicule, that avoided being burned in the subsequent crash. Probably worth noting that Berkshire Hathaway (BRK.A) hit a dot-com bottom of $44,000 per share in February of 2000. It closed yesterday at $278,670 per share.

For those of us who saw our 401K plans become 201K plans during the market mayhem of 2009-2010 the pain lingers. But a refusal to panic enabled disciplined investors to subsequently enjoy one of the biggest bull market runs in U.S. history. If you were buying stocks in the summer of 2009 you were considered an idiot. Today you are a genius for being so insightful at that time.

So all this helps to explain the tendency for emotion to win the day rather than reason. Research has demonstrated time and time again that most investors tend to sell their winners too early (because it feels good to make a profit, any profit) and then hold on to losers (because to sell is to admit that we were wrong, and no one likes being wrong). Having the conviction to avoid these common, painful mistakes requires discipline and the work necessary to fully understand not just what you own, but why you bought it in the first place.

Yet the Big Decision each of us must ultimately make is whether or not to be an equity investor at all. There is no shame in admitting that any loss is too much to bear. Or, that having to make decisions about how and where to invest money we have worked very hard to earn is just too painful, even with professional help. Let’s face it, most investors are not particularly successful anyway. There is nothing wrong with simply socking money away in bank CDs or U.S. Treasuries (the “but what about inflation” caveat notwithstanding, or particularly relevant recently). For most of us, that we routinely spend less than we earn will be the driving factor in creating wealth over time.

Finally, a quick thought about investing strategies derived from the musings of jazz great Miles Davis. Don’t laugh, Davis was making over $200K annually back in the 1960’s when that was a lot of money (his New York City brownstone, Maserati and full-length snakeskin coats weren’t paid for with credit cards). Davis once said that, “If you play a note you didn’t intend to play, what determines whether it sounds like a mistake or a moment of inspiration is the note you play after it.”

Buy a stock; hold the stock, sell the stock or buy more of the stock? Only with study and practice can we become good enough investors to know what note to play next.

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One Response to The Jazz of Investing

  1. dad says:

    Such wisdom from one so young.
    It’s always a pleasure to get your Invest Notes.

    DAD

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