“It’s tough to make predictions, especially about the future.” — Yogi Berra
More than 35 years ago, when I became a floor trader, I quickly realized one thing: Don’t make predictions.
Predictions have a way of making smart people look silly.
I taped a quote to my office wall to prevent me from doing exactly that. Should I ever be tempted to make a prediction it read: “He who lives by the crystal ball soon learns to eat ground glass.”
The unappealing thought of eating ground glass is enough of a deterrent for me. Yet it doesn’t stop experts, who should know better, from making predictions.
A retail expert said they would “give Apple two years before they’re turning out the lights” on its new retail stores.
Another expert said: “Cellular phones would be a niche market.”
And another expert said, exactly two months before September 11: “Terrorism is not the biggest security challenge confronting the United States.”
In May 2007 — when asked if the subprime market posed a risk to the financial system — one expert said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
Over the next year, an “economic tsunami” hit the global financial markets — stocks fell 50%.
Crunch, crunch — there goes the broken glass.
But today, I want to show you a smarter way to focus your energy and time when faced with the unknown of the new year.
My tips will help you grow your wealth regardless of what the market throws at you…
4 Ways to Thrive in Any Market
I want to give you something that will endure — something you can look back on in five years that will still be relevant.
So instead of trying to guess the future, I’m going to give you something much better: A way to thrive in any market environment.
Here are my four points on how to survive in 2019 and beyond.
No. 1. Remember Why You Invested
Why did you invest in stocks in the first place?
You could’ve put your money in a U.S. Treasury bill. You’d have no risk of losing money, and you’d get a steady return.
Instead, you invested in stocks. And the reason is simple: You wanted to make a return greater than that of a Treasury bill.
For the expectation of a higher return, there is a cost: Volatility and risk of losing your money.
There’s no free lunch … anywhere.
Legendary investor Warren Buffett’s partner Charlie Munger said — that if you can’t be calm and composed when you see a market decline, then — “you’re not fit to be a common shareholder, and you deserve the mediocre result that you’re going to get.”
Instead of freaking out and selling your stocks in a panic, ask yourself: Am I selling because I’m panicking, or did something fundamentally change in the company?
If you can’t think of a change in the company that would impact its worth, then you are panicking.
And I suggest you sell your stocks and only keep your money under your mattress or in Treasury bills.
If you have the proper temperament when markets fluctuate, you’ll be rewarded.
No. 2. Stocks Are Pieces of a Business
Most investors see stocks as wiggles on a chart. That’s why many of them lose money.
They try to trade the daily noise of the stock market. That is an impossible game to play.
A recent study from The Goldman Sachs Group showed that close to 70% of stock market trading is done by computers, or high-frequency traders.
Computer algorithms buy and sell stocks based on momentum.
They are agnostic to fundamentals. This creates artificial and volatile market moves.
Instead, see stocks for what they really are: A fractional ownership of a business.
You are now an owner of a business that has products or services, managers, customers and employees.
Don’t sell a great business because the price went down. Instead, you should be looking to buy more.
Over the long term, the underlying worth of the business will determine the stock price.
It’s more important if the business you own a piece of signs a lucrative contract than if interest rates rise by 0.25%.
Keep your eye on the business — the stock price will take care of itself.
No. 3. The Price You Pay
After getting excited about the prospects of a company, many investors rush out to buy the stock.
They don’t give a second thought to the price they are paying. They never learned that the greatest impact on returns is the price you pay.
It’s no wonder that investors can’t figure out what went wrong a few years later.
Even though the company did amazingly well, the stock price hardly moved.
Investors paid too high a price relative to the worth of the business.
Paying too high a price will produce mediocre returns.
An old Wall Street adage says: “A stock bought right is half sold.”
If you buy a stock at a discount of the underlying business’ worth, you’ll never have to worry about making a good sale to give great results.
Like everything in life, price is what you pay — value is what you get.
No. 4. Diversify … but Not Too Much
I know only a handful of great investors who have a concentrated portfolio of five or fewer stocks.
Investors who have success with a tailored portfolio are the Babe Ruths of investing.
The problem is that many investors think they are, and they get a rude awakening when they find out they are not.
I learned earlier on that I’m not Babe Ruth.
If I had 50% or more of my portfolio in one stock, I wouldn’t be able to sleep at night.
I don’t care how well I thought I knew the company and the people running it.
I don’t think I’ll have that high level of confidence in a business, in which I’m a passive investor.
I’ve found there is a sweet spot when it comes to diversification: no more than 20 and no fewer than 10 holdings. My portfolio is diversified over 10 to 12 stocks.
I allocate the same percentage of my portfolio to each holding. This approach allows me to sleep at night.
Around 2010, many great investors piled into pharmaceutical stock Valeant Pharmaceuticals International Inc. (NYSE: VRX).
As the stock soared, it became the largest holding in their portfolio.
In some funds, it made up close to 40% of their portfolio.
And then the business started falling apart.
The company’s business model was flawed, a scandal followed — the stock plummeted.
After reaching a high of more than $250 per share in 2015, the stock’s price fell to less than $20 per share.
It was a loss of more than 90%.
Reputations were damaged, and investors lost money. Many funds and investors are still digging out of the hole that Valeant made in their portfolio.
Be smart, and don’t put all your eggs in one basket. Spread them around an even dozen or so.
You’ll sleep better and enjoy life more.
One year from now, I’m going to take a look at this survival guide and see if it still makes sense.
I’m highly confident it will. I might even add some more points to it.
Like all wise investors, I’m always learning.
During times of irrational markets, be sure to remain calm and rational. If you do, “the stupidity of the world helps you.”
Senior Analyst, Banyan Hill Publishing