By John P. Reese —
Keep Calm and Carry On was a motivational poster produced by the British government in 1939 in preparation for World War II. The poster was intended to raise the morale of the British public as they faced the threat of mass air attacks. Today, the motto can be found on a seemingly endless array of merchandise ranging from coffee mugs to car seat covers.
If only the notion was as widely embraced by investors as it is by slogan-loving shoppers.
During these days when watching the news can be a disconcerting experience (on a good day), it’s especially paramount to keep calm and carry on as it relates to your investment portfolio. The fear of a looming international or geopolitical crisis is the worst time to make investment decisions, even if Chicken Little is running amok. In fact, research has found that “crisis events” don’t materially affect the market. A New York Times article published in May cites comments by InvesTech Research president James Stack, who found that “geopolitical events may be widely feared, and there will often be a knee-jerk reaction when they’re unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important.” Stack notes, according to the NYT article, that “September 2001 turned out to be an unusually bad time to sell stocks: By New Year’s Day 2002, little more than three months after the post-9/11 low reached on September 21, the S&P 500 had gained close to 20 percent.”
Even millionaire life coach Tony Robbins has jumped on the keep-your-powder-dry bandwagon. In his book Unshakeable: Your Financial Freedom Playbook, the famed life and business strategist aims to show people how they can get over their fears and achieve financial success by taking advice from the smartest financial minds. In a recent interview with GOBankingRates, Robbins explained, “Really, what makes this advice unshakeable is that it’s Warren Buffett’s advice, it’s Ray Dalio’s advice, it’s Carl Icahn’s advice, it’s David Swensen at Yale. It’s the smartest men and women in the world telling you this is what to do.” The first step, according to Robbins, is for investors to educate themselves and understand the fundamentals.
Robbins is referring to such basic investor exercises as setting goals, identifying risk tolerance, and taking emotion out of the equation, ideas that dovetail seamlessly with the Validea philosophy. We believe that when investors establish specific investment goals aligned with their risk appetites—then stick to the plan through thick and thin–they significantly increase their probability of success. By identifying companies with strong underlying operations and solid quantitative attributes, we believe investors can be better prepared to stay on course and avoid costly, emotionally-driven decisions.
Warren Buffett, a guru Robbins mentions specifically, is a fervent proponent of level-headedness and argues that when emotions and investing decisions cross paths, it can be messy and costly. He has said, “If you’re emotional about investing, you’re not going to do well. You may have all these feelings about the stock, but the stock has no feelings about you.” The billionaire stock market legend—and inspiration behind one of the stock screening models I created for Validea–is a strong believer in buying well-run companies that boast strong fundamentals and holding on for the long haul. Short term fluctuations, media headlines, and “hunches” don’t have any place in his investment philosophy. If a business has a competitive edge, an “enduring moat”, strong management, and numbers that make sense, Buffett asserts, there’s no reason to behave based on emotion.
Robbins uses the example of Warren Buffett for good reason—his no-frills approach to investing focuses on the measurable components of a company’s operations. He doesn’t attempt to predict market movements or company performance. Instead, he uses the information at his fingertips to determine whether a company has strong operations that are sustainable, that reflect competitive prowess.
I’ve been studying Buffett’s approach for nearly fifteen years. In my book The Guru Investor, I provide an in-depth description of his philosophy and how it translates into my Buffett-based quantitative screening model. Here are some important components of his approach that I believe can help investors become “unshakeable” as they look to invest over the long term.
- Don’t buy a business you don’t understand. Buffett focuses his attention on simple, easy to understand businesses with reliable performance and strong bones. This might include companies such as Monster Beverage (MNST), which markets, sells and distributes energy drink beverages, or leisure travel company Allegiant (ALGT). If he doesn’t understand a business, he says, “we go on to the next one, and that’s what the individual investor should do.”
- Buy value. Buffett strongly believes that “price is what you pay; value is what you get.” He has made a fortune by investing in companies whose stocks are selling cheaply relative to what he sees as the intrinsic value of the underlying business, and has identified certain fundamentals that these types of companies possess. Among them: High returns on equity, good use of retained earnings by management, positive free cash flow, and consistent growth in earnings-per-share. Gilead Sciences, Inc. (GILD), a research-based biopharmaceutical company, would fall under this category.
- Invest in low-cost index funds. Buffett has said, “If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else,” he says, “if it’s not your game, participate in total diversification.” Buffett has said, “If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else,” he says, “if it’s not your game, participate in total diversification.” This might seem out of place coming from a great stock-picker like Buffett, but finding great stocks and sticking with them individually is not a game most investors should be dabbling in unless you have the mindset and tools to give you a good chance of finding, and sticking with, good companies.
- Focus on the long term. Buffett believes that if you’re not willing to hold a stock for a long period of time, “don’t even think about owning it for ten minutes.” He argues that investors should be patient because the U.S. market will yield positive returns over the long term. “Just sit back,” he says, “and let American businesses do what they can for you.” My Buffett-based model gives high marks to Apple Inc. (AAPL) and Tractor Supply Company (TSCO).
- Trust yourself. Warren Buffett is a staunch advocate of marching to your own drummer when it comes to investing. He says, “You must divorce yourself
Photo: Copyright: alphaspirit / 123RF Stock Photo
John Reese is founder and CEO of Validea.com and Validea Capital Management, LLC. Validea is a quantitative investment research firm and Validea Capital, a separate company from Validea.com, which maintains this blog, is a asset management firm offering private account management, ETFs and a robo advisor, Validea Legends and Validea Legends Income. John is a graduate of MIT and Harvard Business school, holder of two US patents and author of the book, “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”.