Even if you traded through the Asian Currency Crisis, the Long-Term Capital Management (LTCM) implosion, the Internet boom and bust, 9/11 and nearly every other market event over the past 15 years, you’d likely be hard pressed to recall anything like what transpired in the markets on Thursday.
I’d never before seen large-cap stocks free-fall 30% in two minutes on no news whatsoever, or ETFs trade at a 25% discount to their underlying net asset value. I’d never seen stocks like Accenture drop from $41 to one cent in the blink of an eye. Of course, I’d never seen the Dow Jones down 1,000 points either.
(As regulators and market officials investigate what prompted the errant trades, it’s worth noting that securities exchanges are anything but free markets: The SEC holds the power to license and regulate exchanges, their listed companies and everything about the brokers and dealers who deal in their shares.)
Last week’s collapse, along with the ongoing stock-market volatility prompted by turmoil in Europe’s semi-socialist states, again reminds us of one of the most simple but useful bits of market wisdom: When in doubt, stay out.
That’s not advice you’ll often hear from any investment counselor, stock market newsletter or cable TV news program — all which thrive on getting you to transact, not on encouraging you to sit on your hands.
Yet we know that a person can’t bet on everything; investing is about making choices. To that end, it’s rational to focus your energies on the themes to which you are most committed. Why waste precious capital on anything less than your best ideas?
I only buy stocks that represent ideas I feel I must be involved with. And while there is a normal sense of uncertainty and fear that comes along with making any investment, I sleep with confidence because I want these risks in my portfolio — even though many won’t work out.
So don’t buy stocks just for fun or just so you can mention them at cocktail parties. If you don’t believe in a pick beyond a newsletter writer’s plug or a TV pundit’s tout, don’t buy it. If you’re going to add a company to your portfolio, it should be because you want to, not because you are bored, unsure or just rolling the dice.
Up until last week, I frequently heard from investors frustrated by the ultralow interest rates being paid on their money-market savings. Of course, when the Dow drops 5.7% in five days and experiences the biggest point drop in history, that 0.76% annual yield suddenly seems more appealing.
But as we often like to point out, you don’t have to make portfolio decisions on an all-or-none basis. Holding any risk asset is easier when you also have savings that won’t be affected by a swing in stocks.
Most important, however, the risks you do choose to accept should be your top ideas, all freely chosen over time, not during a single afternoon in your broker’s office. When investment ideas don’t appeal to me, I skip them.
In a bull market, we get accustomed to buying “AOT” (any old thing) and making money. Following last week’s plunge and recovery, and as we endure the sustained uncertainty surrounding Europe’s entitlement bomb, now is a good time to consider that the only investments worth making are those we voluntarily choose, from our own informed perspective. If you are unsure about, uncertain of or simply uninspired by a holding, better to save the risk capital until a “must own” idea comes along.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
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RT @SmartMoney: When in Doubt About a Stock, Stay Out http://bit.ly/9xr2pH
Via: Convertbond: When in Doubt About a Stock, Stay Out http://bit.ly/bYw1uN /via @JonathanHoenig listen to my friend Jon
RT @JonathanHoenig: When in Doubt About a Stock, Stay Out http://bit.ly/bYw1uN
RT @JonathanHoenig: When in Doubt About a Stock, Stay Out http://bit.ly/bYw1uN
RT @JonathanHoenig: When in Doubt About a Stock, Stay Out http://bit.ly/bYw1uN
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