Author’s Note: This article was updated on December 26th, 2019.
When I wrote this article at the beginning of 2019, I told you:
One year from now, I’m going to take a look at this survival guide and see if it still makes sense.
I did just that, and it’s all true today. Read on for my four tips to help you thrive in any market.
If you want more guidance for the new year — and the chance to profit from the biggest innovations in the artificial intelligence mega trend — check out my special presentation!
Yogi Berra once said: “It’s tough to make predictions, especially about the future.”
When I became a floor trader more than 35 years ago, I quickly learned one thing: Don’t make predictions.
Predictions have a way of making smart people look silly.
I taped a quote to my office wall to prevent me from doing that.
Should I ever be tempted to make a prediction, I could read: “He who lives by the crystal ball soon learns to eat ground glass.”
The thought of eating ground glass is enough of a deterrent for me. Yet it doesn’t stop experts — who should know better — from making predictions:
1. A retail expert said they would “give Apple two years before they’re turning out the lights” on its new retail stores.
2. Another expert said that cellular phones would be “a niche market.”
3. And exactly two months before September 11, 2001, another said: “Terrorism is not the biggest security challenge confronting the United States.”
4. In May 2007 — when asked if the subprime market posed a risk to the financial system — one expert said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Over the next year, an economic tsunami hit the global financial markets. Stocks fell 50%.
Crunch, crunch. There goes the broken glass.
Today, I want to show you a smarter way to focus your energy and time when faced with the unknown of the new year.
My tips will help you grow your wealth regardless of what the market throws at you…
4 Ways to Thrive in Any Market
I want to give you something that will endure — something that will still be relevant several years from now.
Instead of trying to guess the future, I’m going to give you something much better: a way to thrive in any market environment.
Here are my four tips to make money in 2020 … and beyond.
Tip No. 1: Remember Why You Invested
Ask yourself: Why did I invest in stocks in the first place?
You could’ve put your money in a U.S. Treasury bill. You’d have no risk of losing money and you’d get a steady return.
Instead, you invested in stocks. And the reason is simple: You wanted to make a return greater than that of a Treasury bill.
For the expectation of a higher return, there is a cost: volatility and risk of losing your money.
There’s no free lunch … anywhere.
Legendary investor Warren Buffett’s partner, Charlie Munger, once said: “You’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get” if you can’t be calm and composed when you see a market decline.
Instead of selling your stocks in a panic, ask yourself: Am I selling because I’m panicking, or did something fundamentally change in the company?
If you can’t think of a change in the company that would impact its worth, then you are panicking.
And if you’re panicking, I suggest you sell your stocks and only keep your money under your mattress or in Treasury bills.
If you have the proper temperament when markets fluctuate, you’ll see the rewards.
Tip No. 2: Keep in Mind That Stocks Are Pieces of a Business
Most investors see stocks as wiggles on a chart.
That’s why many of them lose money.
They try to trade the daily noise of the stock market. That is an impossible game to win.
A recent study from the Goldman Sachs Group showed that close to 70% of stock market trading is done by computers or high-frequency traders.
Computer algorithms buy and sell stocks based on momentum.
They are agnostic to fundamentals. This creates artificial and volatile market moves.
Instead, see a stock for what it really is: fractional ownership of a business.
You are now an owner of a business that has products or services, managers, customers and employees.
Don’t sell a great business because the price went down. Instead, you should look to buy more.
Over the long term, the underlying worth of the business will determine the stock price.
It’s more important if the business you own a piece of signs a lucrative contract than if interest rates rise by 0.25%.
Keep your eye on the business, and the stock price will take care of itself.
Tip No. 3: Think About the Price You Pay
After getting excited about the prospects of a company, many investors rush out to buy the stock.
They don’t give a second thought to the price they are paying. They never learned that the greatest impact on returns is the price you pay.
It’s no wonder they can’t figure out what went wrong a few years later.
Even though the company did amazingly well, the stock price hardly moved.
Investors paid too high a price relative to the worth of the business.
Paying too much will produce mediocre returns.
An old Wall Street adage says: “A stock bought right is half sold.”
If you buy a stock at a discount of the underlying business’ worth, you’ll never have to worry about making a good sale to give great results.
Like everything in life, price is what you pay, but value is what you get.
Tip No. 4: Diversify … but Not Too Much
I know only a handful of great investors who have a concentrated portfolio of five or fewer stocks.
Investors who have success with a tailored portfolio are the Babe Ruths of investing.
I learned early on that I’m not Babe Ruth.
Neither are most investors.
If I had 50% or more of my portfolio in one stock, I wouldn’t be able to sleep at night.
I don’t care how well I thought I knew the company and the people running it.
I don’t have that high level of confidence in a business in which I’m a passive investor.
I’ve found the sweet spot when it comes to diversification: no more than 20 and no fewer than 10 holdings. My portfolio is diversified over 10 to 12 stocks.
I allocate the same percentage of my portfolio to each holding. This approach allows me to sleep at night.
Around 2010, many great investors piled into the pharmaceutical stock known at the time as Valeant Pharmaceuticals International Inc.
As the stock soared, it became the largest holding in their portfolios.
In some funds, it made up close to 40% of their portfolio.
And then the business started falling apart.
The company’s business model was flawed. A scandal followed, and the stock plummeted.
After reaching a high of more than $250 per share in 2015, the stock’s price fell to less than $20.
It was a loss of more than 90%.
Reputations were damaged, and investors lost money. Many funds and investors are still digging out of the hole that Valeant made in their portfolios.
Be smart, and don’t put all your eggs in one basket. Spread them around a dozen or so.
You’ll sleep better and enjoy life more.
One year from now, I’m going to take a look at this survival guide and see if it still makes sense.
I’m confident it will. I might even add to it.
Like all wise investors, I’m always learning.
During times of irrational markets, be sure to remain calm and rational.
If you do, the stupidity of the world helps you.
Regards,
Charles Mizrahi
Editor, Alpha Investor Report
This article was published on January 17th, 2019 updated on December 26th, 2019.