Throwing the Baby Out with the Bathwater

Days before Trump starts his Presidency, it seems that investors around the world are getting nervous over global economic prospects.  These concerns seem to have universally hit stock prices especially today, including two of my main holdings IPI and BAC.

Days like today are a good reminder on why it can be hard for many people to invest in the stock market.  When the market turns against you short-term, as it is wont to do, it’s easy to lose confidence and give into peer pressure.  In this case, peer pressure is the overall negative sentiment in the market.

But in actuality, it is this same peer pressure (that is so hard for so many people to ignore), that creates opportunities in the stock market for value investors in the first place.

Something to remember is that stock prices are marketplaces that are made up of people.  Yes, there is an incentive for the market to rationally set prices, but you can’t argue that humans are entirely rationale (case in point: Brexit and 2016 U.S. Election anyone?), and if markets are completely rationale and efficient then I would be out of an early retirement plan (I hope not!).

In any case, no one has any idea on what the stock market will do in the short-term.  Regardless, in the near term I continue to expect BAC earnings and dividends to shareholders to increase, along with IPI net profits.  When I see improving business metrics, and falling stock prices, I start getting more comfortable with the idea of getting more and more greedy.

I don’t know when the bottom will come, or what a near-term bottom will look like, but I do know that the market tends to overreact on bad news and paint every company when the same brush, even when companies have unique business models and can respond very differently to what the market is anticipating.  In these cases, I look for what the market has thrown out with the bathwater, looking for gems to pick up, or buy more of.

When you’re not used to stock price volatility, it helps when you feel like you’re in good company:

In the stock market you do not base your decisions on what the market is doing, but on what you think is rational.” -Warren Buffett

“The stock market has forecast nine of the last five recessions.” – Paul Samuelson

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