Trust your teammates! (The Financial Athlete #106)

In team sports,  it’s very clear who’s on your team. They wear the same uniform, only with different numbers. You learn early on to trust your teammates, especially the better players.

Although investing is mostly a lonely profession, investors also should rely on teammates for expertise. Good teammates for investors are accountants, real estate attorneys, and estate planning attorneys.

The problem lies in that many investors rely on others who are not really “teammates”, although they say they are. (If only it were as easy as sports to identify teammates by uniform!) Anybody who is in sales in the stock market is not your teammate. These people always recommend to go long (buy and hold). Instead, for the broad stock market, pay attention to statistics in regards to the secular market.

Investopedia defines a secular market as such: “A market driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period of time. In a secular bull market, strong investor sentiment drives prices higher, as there are more net buyers than sellers. In a secular bear market, weak sentiment causes selling pressure over an extended period of time.”

It’s important to understand the current average p/e ratio of the S&P 500 as compared to its historical average, and to understand where this p/e ratio is trending by looking at multi-year charts or data.

Trusting the valuable teammate called “secular market”, with swings typically lasting 15-20 years, should boost your long-term returns. This is a “timing the market” methodology. The standard advise is to not time the market, but to stay the course in the long-term. This is bad advise for investors because volatility can be tremendous. If you perceive the market to be in the beginning or midst of a secular bear, limit your investments in the stock market to only several individual stocks of strong companies. Stay out of index funds. Focus more on return of principle rather than return on principle. Then you will be prepared for an aggressive re-entry into the stock market at greater bargains in the future. Your timing will not be perfect to buy at rock bottom prices, but that does not matter when you hold for the long-term for companies that remain solid.

‘People always notice what is far away, not what is right under their noses.’ — Heidaviga saga Ch. 14


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: