When do you make an investment shift? When do you change your investment? You change your investment when your investment is no longer appropriate for your objective or time horizon. You should also make a change if fundamentals or sentiment change. Life is about embracing change and adapting to reality.
Investors either overreact to short-term noise and emotion or they do nothing and it’s too late. Constantly review and monitor your investment and make changes if it’s prudent. Being disciplined means making changes when it’s prudent to do so or doing nothing if it’s prudent to do so. Do your research every day and react when it’s appropriate based on research and not sentiment.
Emotions have no place in investments
Investors should be disciplined and should not make emotional investment decisions. Never fall in love with your investments. Fall in love with your wife but don’t fall in love with your investments. Never love or hate your investments. Money flows and despises emotion. Money will flow to those who are unemotional about money and to those who have earned it!
Sentiment drives markets over the short term and fundamentals drive markets over the long term. Humans tend to overreact to short-term noise. We are either too optimistic or too pessimistic. It is either the end of the world or life is great and nothing can go wrong. The truth is somewhere in the middle. Truth north is always true north. We need to get all the facts before we make an investment decision. However, facts change and you need to change with new information. Don’t hold onto the past and yesterday’s facts.
Emotions are the no 1 enemy of a sound investment philosophy and strategy. Warren Buffett says he gets greedy when others are fearful and he gets fearful when others are greedy. Why? Because sentiment is often wrong and the herd normally follow each other like sheep. Sentiment is the market and the market is often wrong over the short term but the market is never wrong over the long term. Don’t try to be too clever with the market. Investors can be arrogant and say the market is wrong and they are waiting for the market to go back to 2008 levels. It is going to be a long wait.
Mr Market is approaching investors every second every day with emotion. It’s either good news or bad news. We are either above expectations or below expectations.
Mr Market is like my emotional 14-year-old daughter. She changes her emotional state more than she takes selfies every day. It’s an emotional roller coaster! Every time I look at her, her emotions change. I need to stop looking at her! As a father, if I had to react to every emotion that she displays we would have had a mass family murder years ago.
Expectations determine our emotions. If we expect a movie to be great and it does not meet our expectations, then we are disappointed and the movie is a bad movie. If we watch the same movie and we have low expectations, we are pleasantly surprised and the movie is a good movie. Has the movie changed? No, our expectations have altered our view of the movie. It’s still the same movie!
Movies are subjective. Be objective and unemotional with your money. Money dislikes 14-year-old daughters and will run away from her and will go to her wise grandfather who loves her dearly but makes informed life choices based on fact and not emotions. Money flows to those who know and money will leave those who feel.
Invest for the long-term
When you invest for the long-term you can afford to be unemotional. Investors who seek short term results will get caught up with the emotional wreck of constant noise and volatility. Long term investors can sleep peacefully at night as they can afford to ignore short-term volatility and emotion. Embrace volatility as it is our reality. Volatility is here to stay and it is going to get worse. Volatility is short term noise and emotion. Great long term results can only be achieved with volatility.
You will achieve your long term goals if you do your homework and make informed investment decisions. The market is people and people are emotional. Do not be swayed by emotions but do not ignore emotions either. Be aware of the markets emotions and do your research. Are the markets emotions based on fact and reality or is the market having a little temper tantrum? Treat the market like your 14-year-old teenager and if you act like a responsible and mature adult, she will turn into a beautiful and stable adult over time.