What Wise Investors Should Do Today
The Dow Jones Industrial Average has notched another loss this morning, a triple-digit decline as I write this, with some wondering if the blue-chip index can remain above the 10,000 mark.
All sectors are in the red.
What should an investor do?
Take a deep breath and think things through. Act, but don’t react.
Why? Because it’s always a mistake to confuse “action” with “execution.”
Action is simply doing something. Jumping up in the air is an action, but it doesn’t get you anywhere.
Execution, however, is something more. It is taking a constructive step toward advancing a goal.
Does a series of losses on Wall Street’s indexes change your investment goals? It sure doesn’t change mine. Not one iota. A broad-based decline probably affects the value of both of our portfolios, but it should in no way affect the fundamental reasons we bought any of the equities we own.
In other words, why should temporary pricing fluctuations have any effect on the management of one’s portfolio? If anything they should be viewed as a potential opportunity to buy, not to sell. If you sell when everyone is selling and buy when everyone is buying, then the best you can possibly hope for is the same return the rest of the herd is getting.
That’s not good enough and you don’t have to settle for it.
Sometimes doing nothing — choosing to refrain from knee-jerk reaction — is the most intelligent course of action. Call it “active passivity” if it makes you feel better. But put it on your list of things to do today. Let this slide ride. Unemployment is high. We knew that. Europe’s debt worries aren’t going to cast us back into the abyss. The BP (NYSE: BP) spill will be capped. It’s not time to worry yet.
Take a minute. Think. How will selling today help you achieve your goals? If you sell at a loss, all that means is your have more ground to make up. And if this drop proves temporary, as it likely will, then you’ll have to commit more resources to buying back the equities you sold in a panic.
Now, if you decide to take selling out off your agenda for the day, here’s something to consider while you wait for the market to regain its head. Distinguish what’s happening to the Dow from what is happening to your specific investments. The fact is there is likely little or no long-term correlation to what happens in the overall market to what happens to your stocks. If you think there is, then either you don’t know enough about your investments or you have invested in the wrong things.
If the Dow drops below 10,000 today, and it might, what legitimate, material impact is that going to have on the businesses of which you are a part owner?
Most probable correct answer: None at all.
Third point: As you hear economic data — be it unemployment numbers, consumer confidence or any of the scores of indicators Wall Street follows — keep one thing in mind: Trades based on those reports are reactive and emotional and they belie existing sentiment.
Would you sell shares based on the weekly jobs numbers? If so, then you’re trading based on guesses. You’re part of a good of people that are looking for short-term swings and not the creation of long-term value. Most individual investors fail miserable at this endeavor. In 99 cases out of 100, an S&P index fund would offer a better long-term return.
Now, look, there’s nothing wrong with trading. Speculators or technical traders or whatever you want to call them serve a valuable role in the economy. And a few investors — armed with good information and who trade with discipline — can do well. But that is the exception. Most “investors” aspire or should aspire to be just that: Owners of businesses who seek to use that ownership to build wealth. Everyone else is just renting pieces of paper.
When the markets lose their head, you must not lose yours. Wise investors can ride out a storm, most often by doing nothing, or doing something else, until the market regains its footing.
So who do I like today? Where are the opportunities that would gel with my investment goals? Well, first I need to make sure I have properly enumerated those goals. I’m interested in long-term growth, and I’m willing to withstand some price swings as I search for it. I want to invest in companies with an outstanding product or service that I can buy at a reasonable price with the possibility for significant gains.
With that in mind, I see a lot of potential with Apple (Nasdaq: AAPL), which has dropped to 20 times earnings, Dyadic International (OTC: DYAI), an outstanding enzyme maker in the biofuel space that has dropped to less than $2.40 but which would be a steal at $5.00 a share, and certainly offshore driller Transocean (NYSE: RIG) which has plummeted in the month since its Deepwater Horizon rig began leaking oil into the Gulf of Mexico.
So, with that in mind, if you feel as though now is a good time to exit a position, perhaps to protect recent gains, then you might consider either Georgia Power Company 8.2% Senior Notes (NYSE: GAT) or the Western Asset/Claymore Inflation-Linked Income Fund (NYSE: WIA), a closed-end fund that’s built to weather stormy markets. These safe-haven securities are recommended by my colleague Carla Pasternak, editor of High-Yield Investing. While these picks are unlikely to deliver standout gains, they tend to be resilient in downturns and also provide a revenue stream from their above-average dividends.
Keep calm and carry on! Many happy returns.