Buy Right Sit Tight - 2020


Investing Tenets for 2020 & Beyond

By Amit Rupani

Dear Readers, wish you a very Happy New Year! In equities investing, the right temperament is more important than IQ. And right temperament can be built by better understanding how this beast, the “stock market" works over a longer period of time. I have shared some of the important tenets in this article which should help an investor to keep right mind-set as we get into 2020 and beyond.

1. Mean reversion is one the greatest truisms of capitalism: The stock market doesn't move in a straight line forever. The market is always forward looking and preempts where the general economy is headed. It moves in cycles just like the economy which leads to bull and bear cycles. Cycles can last for years or sometime decades. We won't know what is going to happen tomorrow but we can prepare for tomorrow knowing where we stand today within existing cycle.

2. Keep low (realistic) return expectations: The S&P500 has given roughly 9.50 percent annual return over last 119 years with dividends reinvested. An investor with long-term time horizon shouldn't expect more than 9.50 percent return from the markets. Instead of living with high expectations and worrying about what will come next, Charlie Munger suggests you “slug it out one inch at a time, day-by-day, and at the end of the day — if you live long enough — like most people, you will get out of life what you deserve." Charlie Munger's recommendation to keep low expectation fits well with both stock market and life.

3. Time in the market and not timing the market: One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months. The opposite of market timing is buying and holding as the market goes through its cycles.

4. Volatility: An electrocardiogram (ECG) is a medical test that measures the electrical activity of the heartbeat. It closely resembles with a stock chart of any normal stock traded in the market. It goes up, goes down, bounces from low, falls from peak, but never moves in a straight horizontal line. A straight horizontal line in an ECG would mean that a person's heart has stopped beating and is dead. Similarly, the stock market would die if there is no volatility. Volatility is the heartbeat of the stock market and we have to live with it. It's just how this beast works.

5. Market Rewards Patience, Discipline, and Consistency disproportionately: According to one study, done by Fidelity in 2014, showed that the investment accounts with best performance were of people who forgot they had an account at Fidelity. Vermont based one-time janitor and gas station attendant showed with his frugal lifestyle and long-term investment philosophy how he accumulated a portfolio worth $8 million over his lifetime. Anne Scheiber, a retired IRS agent who amassed $22 million in wealth (Scheiber died in 1995, so adjusted for inflation, that's around $36 million in today's purchasing power). In the mid-1940s, she retired with lump sum capital savings of $5000 and pension of roughly $3,150. All these are inspiring stories! The common denominator in all these stories is extremely long-term investment horizon and patience. Something to sincerely learn from these stories.

6. Power of compounding: In the midst of daily market movements, investors neglect the power of compounding over a long period of time. The following table indicates the compounded value of 100,000 at different rates for 10, 20, and 30 years. It is remarkable to see how small differences in rates add up to a very significant sums over long period of time.

Investing in equities is a marathon, not a sprint. Happy Investing!

----------

Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: rupaniamit@yahoo.com