By Jonathan J. D’Oleo
As a stockbroker during the Global Financial Crisis I received hundreds of calls from clients worried about their investment portfolio. Frantically, after observing double-digit declines in the market, some of them would tell me they wanted to jump ship or, in other words, dump their intangibles and stay in cash.
After clearly stating that they had every right to proceed in such a fashion, I, more often than not, disagreed with that idea for a variety of reasons. Firstly, in many instances what had taken place was a drop in the price of equities and not a real devaluation of the assets held in the portfolio.
Although the price of any given good ought to faithfully reflect the worth and value thereof, such equivalence is contemplated within a theoretical frame that is built upon a preexistent (albeit nonexistent) perfectly competitive market in which producers and consumers interact on equal grounds amongst themselves and with each other.
In actual fact, capital markets reflect a different dynamic throughout economic cycles. In the short-term, stock trades can be driven by speculation. Over the longer-run, however, supply and demand forces, which are the ones that, in effect, determine the true worth and value of a capitalist enterprise, overtake such distortionary dynamics (aka speculation).
The intelligent investor, therefore, ought to be cool, calm and collected in his portfolio dealings. He does not sell his position in a particular financial instrument solely based on a drop in price. Au contraire, if that particular instrument is from a solid business entity that has a competitive product line coupled with effective channels of distribution, and enough (but not too much) cash flow, then the intelligent decision is not to sell.
Not selling is, as a matter of fact, only half of the intelligent decision. If the investor has investable cash on hand, then he should buy more shares of stock not despite, but because of the drop in price.
The precondition to this “buy, hold and buy-more” approach to investing is selectively choosing quality investments for your portfolio.
Quality investments are like balls that bounce when they hit the floor as opposed to non-quality investments that are like eggs that crack when they smack the ground with their flimsy shell.
When explained in this manner, intelligent investing sounds intuitive. Nevertheless, when left to its own devices, human nature does that which is counterintuitive.
To sell “balls” in a bear market equates to trading golden bars for chocolates.
A loss resulting from a drop in price (not value) in your quality investments is only a nominal loss, unless you decide to sell. Only then does it become a real and irreversible loss.
The opposite is also true. To buy “balls” in bear markets equates to making an intelligent decision in the expectation of a quasi-imminent rebound.
Now, if “eggs” abound in your investment nest, by all means, sell them before they hit rock bottom and crack into worthlessness. But, I reiterate, if you hold “balls” in your portfolio, do not sell them. Let them drop while they are still in your possession for only in this manner will you be able to reap the fruits of a market comeback.
With this said, I encourage you to:
Be an intelligent investor. Do not be a bull or a bear or an “egg”; be a “balls” investor.
Be a contrarian. Sell when the herd buys. Buy when the herd sells.
If you are, in effect, going to be a contrarian you must proceed as a contrarian: knowing that in life we receive by giving, live by dying, rise by falling, and finish first by being last.
And do not worry about your current position no matter how disadvantageous. For, as we say in my country, “the ones in front are not afar off if the ones behind run well.”
The author is a Dominican political scholar, financial advisor, motivational speaker and President of D’Oleo Analytica, Inc.
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