Too often investors’ attention is shifted away from investment research among quality stocks, focusing instead on opinions relating to market trends. Individual stocks can rise in a bear market, and fall in a bull market. You should be buying undervalued stocks — not the opinions touted by magazines and newsletters.
Of course, it is an arduous task to buy when everyone else is selling or has sold. It takes super-human resolve to invest when things look grim, to buy when the so-called experts are telling you that the outlook for stocks in general, or for a particular industry, or a particular company, is uncertain.
But if you purchase the same securities as everyone else, then you will have the same results as everyone else. By definition, you cannot outperform the market if you buy the market. And chances are if you buy what everyone else is buying, you will do so only after it is already overpriced. Bernard Baruch, adviser to presidents, was succinct when he said, “Never follow the crowd.”
Many investors live in fear of an investment not working out. Consider the following example. Invest $20,000 in each of five investments for 20 years. Assume the first investment is totally lost and the second investment returns only the original $20,000 investment.
Assume you receive an annual return of 5 percent on the third investment, 10 percent on the fourth, and you hit a home run and receive 15 percent on the fifth $20,000 investment. If you do the math, you will find that after the twenty years, you will receive back a total of $534,946.
If instead of splitting the $100,000 up into five parts, assume you invest the entire $100,000 in a risk-free 20-year Treasury bond paying 3.33 percent. What would you have at the end of the 20 years? The answer is $193,579. Even with a complete loss of one fifth of the total earning power and a zero return on another fifth, the performance of the diversified investment won out. Not every investment has to work out, but you must be adequately diversified.
Wall Street’s world is fragile, and depends extensively on time and chance. So invest with intelligence, engage in solicitous but sensible discourse when considering the future, diversify your assets and finally be skeptical about every prognostication you are given, including mine.
While I am not one who regularly quotes Scripture, you might want to heed the wisdom of Ecclesiastes’ profound warning: The race is not always to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all. Ecclesiastes 9:11.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 a.m. and 3 p.m.at 1-941-706-3449. For back columns please go to www.RuddReport.com.