Streetwise for Sunday, December 30, 2018

“…The world looks brand-new,” said Hobbes. “A New Year…a fresh clean start,” said Calvin. “It’s like having a big white sheet of paper to draw on,” said Hobbes. “A day full of possibilities,” said Calvin. “It’s a magical world, Hobbes old buddy…let’s go exploring.”

Bill Watterson wrote those words in December of 1995 as he concluded the last of his Calvin and Hobbes comic strips. Every year since then I open my first column of the New Year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin’s magical world…full of possibilities. All that remains is for you to go exploring. 

Looking ahead, I believe the economy is poised to grow at a rate of about 2.6 percent and as the economy goes, so go earnings and therefore stock prices. Yet, too often investors have an overly optimistic outlook for their investment performance. Many expect an 8.5 percent return above inflation, whereas 6 percent might be more reasonable.

If you consider inflation’s compounded average growth rate of 3.2 percent over the past 40 years investor expectations can run as high as 12 to 13 percent annually. Although pursuing that level of return is possible with a 100 percent equity portfolio, 77 percent of individuals in a survey describe themselves as cautious rather than aggressive. Translated, they blanche at the idea of an all equity portfolio.

Surveys have shown that about 80 percent of investors choose safety over performance. This disconnect between the returns that individuals expect and the risk they can bear, leads to emotional decisions and critical investment mistakes that can destroy investment goals.

While investors often say they could do better by avoiding emotional decisions, by their own admission they know they are susceptible to their own emotions, especially when the markets are volatile. 

A major study done in conjunction with a major university over two years utilizing more than 20,000 respondents, asked investors how they would respond if the market dropped 10 to 20 percent over a six-month period.

Only 18 percent said they would add to their equity investments, whereas 45 percent said they would sell off their stock holdings and 38 percent said they would do nothing. Buy when others are selling.

The key to your 2018 financial success will be in direct proportion to the effort you put towards the analytical analysis of future corporate revenues and earnings.

Focus your attention away from the continual prognostications of what might happen and instead concentrate on how to best allocate your investment resources among individual companies. You can forecast a company’s performance; you cannot forecast the market’s performance.

You will be inundated with 2018 market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street but offer salvation…for a price. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.

“What always impresses me,” he once wrote, “is how much better the relaxed, long-term owners of stock do. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional.”

Note to Readers – Save the Date: I will be teaching Advanced Investment Analysis, starting Monday, January 14, for the Ringling’s Osher Lifelong Learning Institute. Call 941-309-5111 for registration and information. About 14 seats left.

My 9th annual talk sponsored by the non-profit American Association of Individual Investors (AAII), titled: “Tactics for Tough Times – Deciphering Wall Street in 2019”, will be on Thursday, January 24, at the Hyatt Regency, 1000 Blvd. of the Arts. Registration/Social/Refreshments 3:30 P.M., Program 4:00 to 5:30, Q&A 5:30. Please call 941-706-3449 to register. $15 per person at the door.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.