Streetwise for Friday, March 16, 2018

Each time an external event such as tariffs or rising interest rates hits Wall Street, the most often asked investment question is, “what should I do now?”

My answer is to stand pat. That does not mean you bury your head in the sand. Media commentary can be entertaining and occasionally useful, but it is not the fodder for making investment decisions.

Now suppose you have completed your diligent research, purchased your shares and the financial markets suddenly take a tumble; or some analyst picks that moment to downgrade your new investment. You are not going to be a happy camper.

It does even have to be a downgrade. The media will often inflate the effects a news event way to the detriment of a company or sector, thereby sending your frustration level to a new high.

Even if the price of your new investment suddenly develops the glide path of a brick, it does not mean you have made a mistake. Unless the news is so dire that there is no hope, hang tight until the company releases its next quarterly earnings report. If the numbers meet your expectations, then stay with the stock. Notice I said your expectations, not the Street’s expectations.

Each time I discuss this issue of short-term market fluctuations, I am reminded of a famous story about Wall Street. In the days beyond recall, 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 plain truth of the matter is that most people who casually invest in stocks do not have yachts, or even rowboats. And one reason is that their attention is too easily diverted from what should be their main objective, finding bargains among quality stocks that can be held for years.

Market volatility breeds uncertainty and doubt, even among seasoned investors. The result is a reemergence of that age-old dilemma of whether to hold onto stocks 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 Fred Schwed, Jr., pointed out in his book, “Where are the Customers’ Yachts,” published in 1940, 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.”

While there is no ready-made solution to this age-old problem, it never hurts to take some profits, particularly if you have identified alternative investments. However, keep in mind that leading issues will often continue to outperform market laggards. Moreover, a sell decision, followed by a buy decision, means two opportunities for error, not just one.

Schwed said there was no denying that the more financial predictions prognosticators make, regardless of how ridiculous, the more business they are likely to do with the resultant increase in commissions or fees, not to mention the increased notoriety. Nothing has changed.

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 does not seem to be 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.