Friday, July 28, 2017

How To Be a Better Investor During Difficult Times

With the markets getting ahead of the underlying fundamentals, a correction is bound to happen in the near-future, and it could be a really ugly one this time around. A Motley Fool article back in 2008 (during the financial disaster) pointed out that now is the time that Baron Rothschild was referring to when he said, "Buy when blood is in the streets." It listed the following 5 ways to help you be a better investor during difficult times:

  1. Be afraid -- be very afraid - Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy.after a significant correction,  a case can be made not to buy virtually any company. Consider General Electric (GE), a company that increased its dividend for 32 consecutive years, but chose not to increase it in 2008.
  2. Avoid black boxes - Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all. Buffett has invested in Goldman Sachs (GS) . However, if you don't understand what GS does, you are better off looking elsewhere for an investment.
  3. Invest only money that you don't need soon - Assume that the near-term market will remain volatile -- even after it smooths out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
  4. Ease in - And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls. 
  5. Buy at a discount - Make sure you're buying shares that are actually cheap. Many companies could trade at prices far lower than before a market correction -- but that doesn't mean they're cheap. 
The article concluded by saying:
There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do.
Source: Why You Should Fear the Future

Full Disclosure: No position in the aforementioned securities. See a list of all my Dividend Growth Portfolio holdings here.

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