Simply stellar thoughts on investing

It is August. The markets are likely down – reacting negatively to some macro-European issue in Italy or Greece. You might be on vacation. You need some good, quick insights on investing. Here they are:

  • The more comfortable an investment feels, the more likely you are to be slaughtered. The best investments are purchased on sale during market downdrafts. The idea is to buy investments from urgent, distressed and emotional sellers. Do this and you will lock-in a margin-of-safety for an investment (where the risk is less than the expected return).
  • Always having 10-20% of your investments in CASH is important. Cash is defensive. Cash is a good-decision pill. Cash lets you opportunistically take advantage of market downdrafts (see bullet immediately above). Cash lets you take advantage of misguided selling. Holding 10-20% of your portfolio in cash takes discipline but it enables you to (a) lose less during market volatility and (b) make more at times of market stress. Any bank or broker that fully invests your account to the last cent is doing you a disservice.
  • Markets are inefficient. The prices quoted on any exchange do not reflect the true, intrinsic value of the company. So, the astute investor simply waits for the market to offer them the price they want for a particular security. Using market volatility to your advantage is difficult – it requires patience – but having the psychological strength to wait for the market to come to you results in gains at a lower level of risk.
  • Passive investing is a good idea. Unfortunately, it does not really exist. Passive investing into an index is an active choice – you are choosing to invest passively. As money pours into index funds, it constantly props up overvalued stocks and keeps prices divorced from fundamentals. Index funds buy stocks without regard for value (rather simply because those securities are in the index). Passive investing therefore leads to asset mispricing, secular over-pricing and the inversion of risk and return – and ultimately bubbles and crashes.

The above thoughts are fairly simple and relatable. Many independent investment managers, like me, hold these thoughts core to their everyday practices. I hope that you consider an independent investment manager at some point. You will appreciate the difference. Sean Miller, 434-825-0000