Pick quality stocks in times of uncertainty
Investors are advised to pick quality companies, which could steer well through these business cycles. One has to remember that progress is cumulative while hurdles are temporary
So much is mentioned about the several strategies to be followed for successful investing, but the execution forms the crux. One may have multiple parameters to consider at arriving a right stock and even at a price appropriate to their philosophical terms, but if they fail to execute the same, the outcome is divergent to the expectations. Moreover, future is completely unknown and uncontrollable, the only things that are in our control is our emotions and how we respond to the changing situations.
It's said that success in equity investing depends not on how the market responds to the news, but a lot on how one would react to the market's reaction. When we are certain about the numerous things that are out of our control, it's better to concentrate on the only few things that we could control. It's amply been proved that there's no correlation between intelligence and performance in equity markets.
A few decades back when the world of investing still hasn't evolved to the current form, availability of information is scarce and so there was an advantage in the form of access to credible data about a company. If one were to know it in advance, then it's a worthwhile advantage to have. But now most of the information is available almost for free coupled with analysis and trends, etc., which no more remains an advantage. Even the various analytical tools that could be helped to spot the finer mispricing could be acquired pretty instantly by opting a software subscription. It no further requires one to learn the actual analysis, but just the pointers on what to look for.
Therefore, the only remaining advantage tends from that of behavioral and of one's own self. This probably explains why in recent years, the popularity of the behavioral finance has grown not just from the academic perspective, but from also among the investing community. Wherever we look around in the world, we see lots of problems that need solutions and its entrepreneurs who try extracting value or business sense in finding solutions for these problems. Arguably, one common trite any equity investor must carry is an unlimited reserve of optimism. History is replete with instances where the equity investor has been adequately rewarded for their patience and sticking to or executing their philosophy.
Equity investment, unlike trading, should be looked at as owning a pie of a business, however, small or large it is. It means that as an investor, though a minority, one becomes a stakeholder in the future of the business or an organization running this business. So, this needs a bit of knowledge about the industry, company, etc., which as I mentioned earlier is available abundantly. Of course, like any individual life, there are times of despair and desperation in a business, many-a-time to the changing environment. Obliviously, like an individual who adapts to the change, responsive organizations go through adapt to the change and this wouldn't happen overnight.
This, thus becomes imperative for investors to pick quality companies which could steer well through these business cycles. One has to remember that progress is cumulative while hurdles are temporary. For instance, if productivity gains were improved due to a pandemic, the company could retain these as their best practices in the post-pandemic world further increasing their margins, which makes odds in favor of growth in the long-run.
As the vintage increases, the biggest factor of investing comes into play, compounding. A very interesting way as Michael Batnick put it: if I ask you to calculate 8 added nine times in your head, you could do it in few seconds (it's 72), but if I ask you to calculate 8 to the power of 9 then your head will explode (it's 134,217,728). The power of compounding lies in the number of years and not in the percentage of return that many of us crave for. So, it's more to do about time spent in the market than timing the market - a golden rule.
While many assume the role of an advisor is to come up with outperforming ideas, forecasts, etc., the pivotal role they could perform is by being a speed bump. Every investor undergoes capricious moments or emotions due to the market volatility; an advisor would help investors pause the train of thoughts even for a few seconds, which allows the investor to regain rationality. It's thus helpful to have a good advisor for every investor.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at firstname.lastname@example.org)