Like last year at this time, events and facts have been blown out of proportion and only negative indicators are taken as the “truth” with which to forecast a trend. For example, the 2nd quarter slow-down, aided by the Japanese tsunami and its aftermath has gone from being (1) a temporary reversal to (2) a signal that global economic growth is slowing in 2011 to (3) an indicator of a permanent slowdown to, now, (4) a precursor of a worldwide recession (read “depression”).
This sort of one-upmanship, seeing who can create the scariest vision, may make for increased readers and viewers, but it is playing havoc with investors’ emotions and causing many to abandon their holdings at artificially low prices. (Artificial because the selling is based on overly dire and fearful forecasts.)
To have investing success in times like these, we need to practice 3 C’s: Contrary thinking, Conviction and Courage.
I previously covered this key practice for investing success (e.g., see ”5 Steps to Successful Contrarian Investing”). “Contrary” doesn’t mean “ornery” – rather, it means going against popular opinion when common sense says it is overdone. In both good times and bad, we can see cycles of investing fads and fears that overdo price moves. By maintaining our own counsel, we can avoid the added risk and poor returns that come from following the crowd.
Conviction (1): Investment plans and strategy
“Conviction” covers many levels of investing, but primarily it applies to sticking to our plans and actions regardless of what others say or what the market does. This perseverance does not mean ignoring facts that alter our analysis. Rather, it means not taking action because we are not currently being rewarded or because our feelings are telling us to give up on our previous plans.
Conviction (2): Capitalism and democracy
Normally, this level doesn’t require discussion. Most U.S. investors believe that the country’s approach to capitalism and democracy is appropriate - even in bear markets. However, there are times when worries surface that the U.S.’s principle foundations are lacking and need fixing or outright replacement. Two previous periods when conviction flagged were the Great Depression and the late 1970s/early 1980s. Today is reminiscent of that latter period.
The lack of conviction today shows up particularly in discussions of the economy and business leaders, the banks and bankers, the regulatory process and legal system, and the investment markets and Wall Street. Overlaying all of this, made especially evident during the debt/deficit debate, is the belief that the political process is broken.
Rarely (never?) is anyone happy with all aspects of the U.S.’s systems. However, predicting failure or collapse is a losing game when it comes to investing. This is the time to remember J.P. Morgan’s instruction:
Remember, my son, that any [person] who is a bear on the future of this country will go broke.
It’s all well and good to say, “be contrarian and have conviction.” However, when everything and everybody seems to be going the other way, that is a daunting instruction to follow. We are in one of those times, and the solution is to be courageous.
Definition of courage: mental or moral strength to venture, persevere, and withstand danger, fear, or difficulty.
Put more simply, it means holding our positions, refusing to sell our holdings at today's low prices just because others are screaming, "Sell!"
The bottom line
The bottom line
For investing success we must be able to get through extreme times, both good and bad, without being enticed or frightened into changing our investment plans. Contrary thinking, conviction and courage are the traits that allow us to accomplish that goal. With today’s scary forecasts and the stock market’s wild ride, we need to practice those 3 C’s more than ever.
Another J.P. Morgan observation might help. When asked what the stock market will do, he said, “It will fluctuate.” The last two weeks have certainly proved that statement.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Positions: Long U.S. stocks and U.S. stock funds