Streetwise for Sunday, March 10, 2019

Readers and students often ask the question of how they should react to an unexpected external event, one that suddenly upsets Wall Street’s apple cart? My answer is always the same…stand pat.

That is not meant to imply you bury your head in the sand. Unanticipated events and the seemingly interminable media commentary that is sure to follow is not the fodder with which to undertake investment decisions.

For example, you have completed your diligent research, purchased your shares and suddenly the market and/or those shares take a tumble. Or it could be that a Street analyst picks that moment to downgrade your new investment. No, you are not a happy camper. 

Moreover, the media will often inflate the effects a negative news event to the extent that it magnifies the incident in the minds of the public to the detriment the company and your frustration level.

Even if the price of an investment suddenly develops the glide path of a brick, it is not necessarily an indication that you have made an error in judgment. 

Unless the news is so dire that there is no hope, wait for the next quarterly earnings report. If the numbers meet your expectations, regardless of whether they meet those of the Street, stay with it. Notice I said your expectations, not the Street’s expectations.

In every discussion of market fluctuation, I am reminded of a famous anecdote about Wall Street from the book by Fred Schwed, Jr., “Where Are the Customers’ Yachts,” published in 1940. 

Schwed wrote, “In the days beyond, an out of town visitor, upon arrival at the Battery in Manhattan, saw several handsome ships riding at anchor. Look, his guide said, those are the bankers and brokers yachts. Where are the customers’ yachts, asked the naïve visitor”?

The reality is that most investors are not destined for yachts or even rowboats as a result of their investment endeavors. One key reason is that they are all too often diverted from what should be their main objective, finding bargains among quality stocks and then holding on to those bargains.

Market volatility breeds uncertainty and doubt, even among seasoned investors. The result is a reemergence of that age-old dilemma of whether to hold that in which you have a profit; or sell and maybe invest in market laggards; or perhaps move to the sidelines to await further developments?

As Schwed pointed out, investors have an unfortunate habit of asking about the financial future. He wrote that if you do someone the honor of asking a difficult question, you may be assured that you will receive back a detailed answer. Unfortunately, it will rarely be the most difficult answer of all, “I don’t know.”

Although there is no ready-made solution to this age-old problem, it never hurts to take some profits, particularly if you have identified alternate investments. However, keep in mind that market leaders will often continue to outperform market laggards. Moreover, a sell decision, followed by a buy decision, compounds the possibility of error by two.

There is no denying that the more prolific the prognosticator, regardless of how ridiculous, the more attention they are likely to attract. The only tangible result is an increase in notoriety. Other than that, nothing changes. 

Schwed’s book shows that as far back as 1940, the foretelling of price moves had become key to Wall Street’s business. And it still is. So, Schwed’s advice is that when you hear market predictions you might want to ask yourself the following: Are they good; are they slightly good; are they any damn good at all; how do they compare with tomorrow’s weather forecast; how do they compare with tipster horse-race services?

In his book, “Investment for Appreciation,” published in 1936, L.L.B. Angas wrote about prognosticators, pointing out that their theories, particularly about chart forecasting, “Are true part of the time and none of them all of the time. They are, therefore, dangerous, though occasionally useful.”

The same could be said of the practice of flipping a coin to determine whether one should buy or sell – all except the word “useful,” which is not admissible in either case.

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.RuddReport.com.