Turn The TV Off
By Roger Nusbaum, AdvisorShares ETF Strategist
In a lot of these blog posts I write about sticking to process, maintaining a diversified portfolio while trying to avoid over trading accounts in an emotional, knee-jerk fashion. One source of emotional responses can be stock market television that “helps” you figure out how to play earnings season broadly or will have people on to narrowly guess what a stock might do after it posts its earnings result.
A stock that I own (naming names becomes complicated for compliance reasons but won’t matter for this post) went on a bit of a wild ride lately, selling down some in early June and then got caught up in the Brexit reaction to sell down even more. It is a global, mega cap company that is plenty profitable and there is plenty of demand for its widgets. I’ve owned the name for about 12 years. At times it outperforms and at other times it lags but long term it is noticeably ahead of the S&P 500, not dramatically so.
With the stock near it’s low, one of the more famous stock market pundits said “you have to let it go.” Shortly after that comment it went on a tear, taking back what was lost in June and then some, to make a new high for the year. That the pundit turned out to be wrong is not the thing, his job is to guess what stocks will do and that is what he did.
I have always been a big believer in building a portfolio with both ETFs and individual issues but if you’re going to include individual issues, you need to understand the big picture for the names you own, be in touch with the short term factors because they could turn into long term factors but do so without being overly reactive to the news. If one of your stocks is a 100-year old soap company that’s been increasing its dividend since before you were born, you probably won’t need to trade it based on the election. In any given year it might sell a little less soap and lag behind the market but it could just as easily sell more soap in given year and outperform, all the while raising its dividend. You probably just need to be on the lookout for people no longer washing and the company not keeping up with whatever replaces soap.
So it is with my stock mentioned above. Some years it sells fewer widgets and lags and some years it sells more widgets and outperforms and for now there is no visibility for obsolesce.
Obviously there will be plenty of stocks that don’t fit the above description and as an owner of individual issues you need to know the difference with the realization that sometimes when you sell a stock you will be right but other times you will be wrong but selling in reaction to news that won’t impact how many widgets or bars of soap are sold makes for bad investing.
In a similar vein you also need to know whether you are vulnerable to a compelling story as told by a famous stock market pundit. I have made the comment before that I am sucker for a good story. All the stories sound great. Remember Naveen Jain in the late 1990’s? He told a great story, how could it not work, how could you not invest? Thinking a story sounds great is fine, committing capital (buying or selling) is where people get in trouble. Stick to what you know, try to expand what you know, avoid learning expensive lessons with your capital and have introspection about your strengths and weaknesses as an investor.