Dave Sather's Money Matters : Running for the door
Aug. 9, 2011 at 3:09 a.m.
The past two weeks, especially last Thursday, provided a not-so-subtle reminder that people and financial markets do odd and emotional things.
The market dropped 512 points, or 4.3 percent in one day. As things progressed, the rout worsened. Since July 22, the markets have dropped 10 percent.
Thursday evening, I sat in H-E-B's parking lot, waiting for Carol to return from a trip that included three necessities (Blue Bell ice cream, Diet Coke and dog food). Thankfully, the car cranked out cold air conditioning as I pondered the market's performance.
A variety of websites predicted doom and gloom. If correct, I wondered why, with the world coming to an end, was it so hard to find a parking space at the grocery store? Maybe everyone was stocking up for an "end of the world" party. Or maybe, people were just going about their normal day.
H-E-B provided an interesting observation point. The financial markets sold off rapidly and people ran out the door selling investments as quickly as they could.
And yet, nowhere in the panic did I find the owner of H-E-B, a privately run Texas corporation, running out of his store screaming, "I'll sell my entire franchise to the first person I find at the first price you will offer." And yet, this is exactly what so many people were doing with their own investments.
Obviously, H-E-B's owner knows behavior of that nature is highly illogical.
This gives us a great opportunity to see how business and investing should be conducted.
1. Own businesses that you would be perfectly happy owning if they did not trade publicly. When investing in stock market assets, whether we own one share or 100 shares, behave as if you own the entire company.
2. Just because you can trade for an $8 commission, does not mean you should. Investments need to be evaluated based upon their long term ability to create earnings and wealth for their owners.
3. There is a massive difference between investing and trading. Trading is nothing but gambling on short term price movements. If people want to trade we encourage them to go to Las Vegas and enjoy a show before they give away their money. Inevitably, they will.
4. Do not invest in the stock market unless you have a long term (10 plus years) timeframe. Unexpected things happen over short periods of time. With a short-term mentality, you might get lucky and you might not. However, time and patience have a very effective way of putting the odds in a logical investor's favor.
5. Between 2000 and 2009, Morningstar's fund manager of the decade produced returns that averaged an astounding 18 percent per year. Sadly, the average investor in this fund lost 14 percent per year in the same fund over the same time frame. Why? Because investors jumped in at the wrong time and out at the wrong time. Timing the market is a fool's game.
6. Much of Thursday's performance was due to over-leveraged hedge funds having to sell to get out of bad bets made with borrowed money. Debt kills.
7. Many things in this world are beyond our control - enough to drive us to distraction. If you focus on everything you don't control, you will never act. Instead, make logical decisions based upon the things you do know.
8. Keep things simple and understandable. Warren Buffett has often said that in investing, unlike Olympic gymnastics, there are no extra points for an increased level of difficulty.
Certainly, there are many reasons to be concerned. However, a logical approach will continue to well serve the long-term investor.
Dave Sather is a Victoria Certified Financial PlannerT and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.