The Bipolar Investor

About a month ago the financial markets were preparing for the end of the world. BREXIT was in the air and when the UK voted to leave the European Union, markets sold off violently in the typical knee jerk reaction. In the intermediate or long term, the decision to sell stocks might still prove to be the correct one. But in the short term, it was incorrect because after about a week of sell-off, many markets including the U.S. Stock market, sharply reversed course and went on to all-time highs where they currently stand. Abrupt selling by investors proved shortsighted as the BREXIT sell off was a chance to pick up shares in quality companies at discounted prices.

Time and again the media helps magnifies events that don’t deserve the panics that ensue. Ultimately though, it’s the investors who should shoulder the blame – after all, the media can’t force investors to dump stocks. In my early years as an investor, I was duped on more than one occasion. One of the talking heads on a financial news program made some disparaging comments about a stock I owned. As a result of this so called “expert’s” opinion, I sold. Much to my chagrin, the stock rocketed higher in the ensuing months. I vowed that would be the last time an expert would sway my opinion. And to this day, the talking heads have never influenced me to make an irrational decision.

To help reinforce that painful lesson, I keep a long-term chart of the S&P 500, and several other stocks that I hold, nearby. When I get the urge to sell because of some temporary bad news or just a normal stock market correction, I look at the charts dating back several decades. Selling, at almost any point in the past 30 years, was not in my best interest. Considering the transaction costs and the capital gains taxes, even dodging some steep sell-offs would not have been worth it. Nearly every stock I have sold in my investing lifetime is substantially higher than when sold. Sure, I had good results nonetheless, precisely because I held on with many of my investments when tempted otherwise. With some stocks, I was smart enough to buy them back or purchase more shares when temporary sell-offs engendered a buying opportunity.

The market always gets a little crazy, and the irrational part of our brains brings out some very destructive behavior. Case in point: ISAW portfolio member Stryker. We were on the cusp of a double in this stock. It had solid double-digit gains in 2016 (and still does). Yesterday, they announced earnings, and they were better than expected. Quarterly earnings and half year earnings beat street estimates. Long term, Stryker has done admirably. They have exhibited great earnings growth and great product innovation. The maker of medical devices (artificial knees, hips, etc.) has nearly quadrupled from its 2009 low to its all-time high, reached a few days ago. But the company guided slightly lower for the third quarter. How did investors react? They sold the stock off viciously by about 5%.

Why investors would place such great emphasis on one quarter defies comprehension. Imagine buying a house for $200,000 and someone comes along and offers you 5% less for your house—how many Americans would sell? I’d guess close to zero. But with stocks, they dump mindlessly without regard to the road ahead.

There are all sorts of investor types that might have had good reason to sell. Perhaps a trader or hedge fund owns shares and had a nice profit, so they saw this as the perfect excuse to take some money off the table. Perhaps a pension fund was slightly over-weighted in Stryker, and they had to rebalance the position and offload hundreds of thousands of shares. These two examples demonstrate how stocks can sometimes get temporarily whipped around, that in no way reflects the underlying business. These are perfectly legitimate reasons to sell. But the great advantage to being an independent investor is that you are beholden to NO ONE. So be careful. Don’t place too much stock in what the talking heads on TV are saying. Think rationally, and think beyond one quarter’s performance. Your portfolio will thank you. As for Stryker, I’d bet it claws back the 5% loss in the weeks ahead. As we always maintain, at In Sickness and Wealth, we eat our own cooking, and we haven’t sold a share of Stryker.

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