If you’ve been reading SMI articles even for a short while, you know how much we stress the importance of process. However, two recent conversations reminded me that it’s actually pretty rare to find investors who have chosen an objective, trustworthy investment process and have remained faithful to it.
The trouble with “sitting this one out”
In the first conversation, a friend confided that he was planning to sell all of his stock market investments and stay in cash until sometime after the upcoming presidential election. He’s convinced that the election will have a major impact on the market and he’d rather be on the sidelines when it does.
Of course, no one knows who will win the election or how either outcome will impact the stock market. And yet countless speculative articles have been written on the topic, and countless others will be written before November 8th.
Even the presidential debates are prompting all kinds of scary-sounding predictions. Before yesterday’s debate, the sentiment among crystal ball-gazers favored a big sell-off should Donald Trump win. Never mind the fact that determining the “winner” of a debate is often a very subjective matter unto itself.
After the debate, stock futures rose by triple digits, prompting headlines of a “relief rally.” Apparently, enough debate analysts agreed that Trump did not win. But the rally soon faded, which analysts blamed on news of declining oil prices. Then the rally picked up steam again, prompting a new round of articles with new explanations.
The takeaway? It’s far better to be proactive in following a trustworthy process than reactive to the latest headlines or your emotions.
If fear — whether headline-induced or self-inflicted — prompts you to get out of the market, when and why will you get back in? The lack of a disciplined process usually leads to poor investment results and a poor night’s sleep.
Distinguishing signal from noise
In the second conversation, an SMI member said he heard that a major bank was stockpiling gold. He wondered whether that means he, too, should stock up. I reminded him that our recommendations have nothing to do with such news. We let momentum numbers tell us when owning gold makes sense and when it doesn’t.
He also mentioned that he recently read another investment newsletter in which the publisher warned of an impending “currency crisis.” Again he wondered what we’d recommend doing in response.
And again I reminded him that our recommendations are not based on such predictions. I encouraged him to re-read the descriptions of our strategies, make sure he understood them, consider which one is best for his time frame and temperament, and then commit to it.
After I hung up, I did a quick Internet search on the name of the newsletter publisher he mentioned. It took less than a minute to discover that he had once been convicted of fraud in connection with a past stock prediction and was ordered to pay $1.5 million in restitution and civil penalties.
It’s an extreme example, but it points to the need to decide which voices you’re going to listen to and which ones you’re going to tune out.
A lost art
As much as we stress the importance of process, it seems that its significance is still not widely understood or appreciated. Financial magazines and web sites, and even money management firms, continue to recommend investments in the same manner that restaurants recommend their “soup of the day.”
When it comes to chowder, it’s okay to be adventurous. Go ahead and try something you’ve never tried before based on the recommendation of a server you just met.
However, choosing investments that way — without a trustworthy process — is all but guaranteed to leave you with far bigger problems than a bad taste in your mouth.