August 25, 2015
Spoleto, Italy
[Editor’s note: This letter was written by Tim Price, frequent contributor to Sovereign Man’s Notes from the Field, and editor of Price Value International.]
Hundreds of thousands of years ago, our early ancestors had a unique way of dealing with volatility.
If something was truly threatening, our instincts would kick in. So we would either dispose of threats by hitting them with a rock (‘fight’) or by running away from them quickly (‘flight’).
This ‘fight or flight’ response served our ancient ancestors well. If it hadn’t, we wouldn’t be here.
‘Fight or flight’ serves the modern investor less well.
Responding to an opening 1000 point drop in the Dow by clubbing your screen with a rock is hardly an optimal strategy.
Neither is dashing out of your house or office instead.
Dealing with wild market swings– like a $150 billion intra-day round trip in Apple’s market cap– has to be a learned response instead. That isn’t easy when the financial media is yelling “Fire!” at the top of its voice through a megaphone.
How you respond to this week’s extraordinary market volatility should be a function of how your investment portfolio is structured.
If you have a sensibly diversified portfolio, with holdings of cash at reputable banks, and investments in high quality businesses with little or no debt bought at prudent valuations, and perhaps an allocation to real assets like productive real estate or gold, then what are you really worried about?
(And if your portfolio consists of low quality, poorly managed, heavily indebted companies, you may need to think about replacing your financial adviser.)
As JP Morgan himself once said, markets fluctuate. If you’re tempted to sell good investments today because of heightened market volatility, you should ask yourself why you bought them in the first place.
And if you’re losing sleep because of the manic gyrations of the stock markets, perhaps you have too high an exposure to stocks to begin with.
Perhaps the best quote so far to emerge from this week’s collective panic is from the fund manager who remarked that the stock market is the only market where things go on sale and all the customers run out of the store.
Human beings are emotional animals. We crave certainty, especially in financial markets where such certainty cannot possibly exist.
And at times of high drama, we tend to lose any ability to account for the bigger picture or the longer term.
But just because others are acting irrationally doesn’t mean you have to join them.
Benjamin Graham, the acknowledged father of value investing, once remarked that “in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
These are clearly testing times for all investors. But allowing emotion to hijack your investment process is just as clearly the wrong thing to do.
For a sensibly diversified investor, the appropriate response is to dial down the volume from the financial media. And then to do precisely nothing.
