Invest Skeptically

Jonathan Chevreau writes about Dennis Gartman’s presentation at the Toronto Financial Forum on his blog. He reports how the “veteran trader and newsletter publisher” urged investors to “buy what’s already going up, and to sell investments that are going down”.

“[Gartman] also suggested that even top traders like himself will be wrong 60 to 80% of the time or more. That’s why it’s important to sell quickly when it’s apparent a trade is not working out; and to pyramid profits and buy more when a pick works out and the market validates your idea.”

When I read these comments, I wonder just who the audience is at “Canada’s one-stop resource for investment education and financial guidance.” Are they mostly active traders who are trying to trade their way to riches? I just happened to be looking at Chevreau’s blog today but a quick flip through the newspapers or business TV programs will yield many more market commentators advising some sort of action or reaction.

They all remind me of the Warren Buffett quote: “Wall Street makes its money on activity. You make money on inactivity.”

Trading stocks can be a fun and rewarding hobby. But for most individual investors (who have day jobs, families, and don’t spend all day staring at a Bloomberg screen) I believe that a boring buy-and-hold approach to investing is more appropriate. This idea might seem blatantly obvious but it’s easy to forget with all the voices on internet blogs, newspapers, and TV encouraging us to trade something.

I had a coworker once who said that portfolio management is mostly about managing your emotions; and I think he was right. From my personal experience, I’ve found that it’s easy to get caught up in the excitement and the temptation towards activity. When fear (or euphoria) is high and all the talking heads are saying, DO something, it takes a lot of discipline to go back to a rational place and remember all the planning that went into creating my portfolio: investment objectives, time horizon, asset allocation strategy, and buying quality companies (good earnings, cashflows, identifiable growth plans, etc.) at reasonable valuations.

I guess I’m writing this blog today because the recent market volatility is starting to play with my emotions, making the cacophony of opinions resonate all the more, and because I need a reminder that I’m an investor and not a trader.

When reason is not enough to sit and watch dispassionately as my stocks go up and down 5% a day, I’ll use this bit of psychological trickery I found at the Motley Fool: How do you reduce the volatility of a stock? Don’t check the price.