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Investing with Courage in the New Year

By From the Trading Pits FOXBusiness

I’ve often dreamed of what I would do -- what conviction I would possess -- should I be able to peek at the future headlines of a newspaper.  Picture this year receiving the October headlines in July or the December headlines in October?

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Oddly, 2014 may be among those years where acquiring the captions beforehand could’ve been painfully detrimental the pocketbook.  Face it, all markets are challenging however; the last six months have been extraordinarily so as the super-size market moves simply haven’t justified the super-sized market news.  Attempting to blend our sturdy domestic economic landscape, corporate health, core economic numbers with disinflation (or deflation), a highly fragmented global business cycle, Russia rumblings, and the potential for a hard landing in China, and come up with a profitable investment thesis -- even beforehand -- would prove profoundly difficult indeed.

Consider the last six months whereas oil plummets over 40%, the U.S. dollar climbs from practically “worst-to-first” among the majors, and soybeans and corn catapult from the depths of despair.  In the midst of all this we observed a seemingly benign retail sales report bullied U.S. 10-year yields more than 0.30% in a few hours, a stock market that made a colossal mid-October head fake, along with the Norwegian Krone dropping 5.5% in hours only to resurface basically unscathed.

Following a recent FOX Business appearance, I entered a taxi driven by an unusually delightful driver who, after a few minutes of pleasantries, provided me with his perspective on the current stock market narrative:

“All I know is this constant up-and-down business is for the birds!”

“Tell me exactly what has changed in this world to make the stock market dive so abruptly and then, just week later, bounce back as if nothing happened?” 

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“The entire thing seems rigged,” he added, “Market gyrations are meant to scare people and the only one who seems to profits is the fox guarding the henhouse!” 

As the taxi approached my destination it was now dark -- yet not dark enough for the city store lights to be cheering.  His parting words to me were, “You need to have courage to be a successful investor -- everything else is just rock-and-roll!” 

Little did the cabbie know that he just delivered to me my next column on a silver platter.

The True Definition of Courage

On a cold, crisp January afternoon in 2009, US Airways flight 1549 departed New York’s LaGuardia airport and, within minutes its engines consumed several eight pound migratory geese, abruptly compromising the engines thrust facilities.  Commanding pilot Captain Chesley B. “Sully” Sullenberger was a former fighter pilot who had been a commercial airline pilot since 1980.  At the time of the accident, he had logged nearly 20,000 flight hours.  In addition, he was a renowned safety expert and a glider pilot.

Imagine the alternative scenarios if Captain “Sully” had instead taken a few moments to reference the emergency handbook on bird strikes; he would’ve been thumbing through page four hundred and sixty-something in concert with the A320 tumbling like a brick over the Bronx.  Or, suppose there was a freshly minted pilot in-command, who squandered precious seconds debating his potential options.

Captain “Sully” had courage in the truest sense of the word -- the ability and willingness to confront fear, danger and uncertainty and to act upon it at a moment’s notice.  He undoubtedly accumulated this virtue by spending his life making thousands of seemingly minor choices. All his instincts had been trained so that when the instant arrived he didn’t have to stop to contemplate; it just came naturally.

Avoiding the parlor games

Unfortunately, when market volatility is on the rise, when market moves don’t make sense, too many of us are overly anxious to hear what others are saying and doing.  We often draw comfort from self-anointed experts who soothe us with predicting the unpredictable.  Certainly we’ve all gotten lucky at times however, at the end of the day, if your portfolio asset allocation mix needs a prediction -- holy water sprinkled over it -- be prepared for eventual unmet expectations and frustration.

Believe me acquiring a holistic view on your portfolio takes a lot of courage. Being able to drown out the noise, having the constitution to stave off the pressure of your brother-in-law (who can afford to garage a sports car in Manhattan) who is touting the next stock fad, rebalancing when its wise not when it suits -- all of these things are hard work and, quite honestly, don’t come naturally.

For long-term success, portfolios should be as broadly invested as possible, including in companies outside the U.S. that are both large and small. And you should be regularly and unemotionally rebalancing your portfolio: Buying when prices are relatively low and selling when prices are relatively high. There's never a guarantee when it comes to stock investing, but I know that value companies  have a high statistical probability of a return premium over a lifelong investment portfolio.

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