“Credit is the canary in the coal mine.” – How can you prepare for the ups and downs of the market? [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Hello, everyone. Happy mid-week!
We’re excited to share with you another great investing tip.
Every Wednesday, we publish articles about various investment strategies and insights. We believe having knowledge about these topics will help you achieve true financial freedom.
Today, let’s continue on our topic about the fifth investing discipline of the world’s greatest investors.
Keep reading to know one of the ways you can TRULY capitalize on bull and bear markets when they arise.
The Independent Investor
In a past “The Independent Investor” article, we talked about the first part of the fifth investing discipline of the giants:
Capitalize on bull and bear markets when they arise.
There, we highlighted that the bull market and bear market phenomena have been in effect for over 300 years of recorded financial history, and that is why amateur and veteran investors alike shouldn’t panic in times of stock market volatility.
We also gave a brief background about the origins of the “bull” and “bear” markets, and the use of these terms in finance.
Today, we’ll focus on the second part of this investing discipline. Any ideas?
Reacting and NOT predicting!
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According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, smart investors are always prepared to act, but they never act prematurely.
They don’t try to guess ahead of time whether a bull market is ending or a bear market has occurred. These people only recognize the patterns of the stock market. In fact, that’s ALL disciplined investors do and can do!
Here’s what some of the greatest investors in the world say about reacting to but not predicting the markets:
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” – Peter Lynch, former manager of the Magellan Fund at Fidelity Investments
“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” – George Soros, founder of the Soros Fund Management
What happens when you try to predict the markets?
First, you risk blowing up your investment portfolio. Trying to predict the markets can cause you to short sell stocks, and that’s not a good practice for investors. Instead of wasting your time and energy guessing what will happen to a stock, use your time and energy to study and find a suitable investment strategy for you.
Second, you risk trading the wrong stocks. Some investors invest in stocks with no pattern and volume. They want to be the first one to put their money in those stocks before any significant change in the markets. However, that poses lots of trouble. It’s similar to investing based on gut feeling, which could negatively impact one’s investment portfolio.
To avoid reaching that point, you have to change your mindset from wanting to be the first one to invest in a stock before it moves. Wait for the trade to come to you before you put your money in the trade.
Third, you risk buying the “top,” or the peak price of a security or asset during a trading period. Always remember that buying high and selling low is a recipe for disaster. The opposite of that—buying low and selling high— is a recipe for success, and many of the world’s billionaire investors can attest to that.
The Importance of Good Credit and Recognizing Bad Credit
Professor Litman says as an investor, you can’t predict the markets’ waves. However, you can ride the waves correctly when you’re in the middle of them.
Take a look at this story…
Mitch Julis is a partner in Canyon Capital, one of the best-run credit and equity hedge funds in the world. He has focused on the importance of monitoring credit to understand where stocks are going.
“Without a firm handle on credit analysis, we’d argue you can’t fully understand the wealth creation process as an equity investor.”
Julis’ concept is simple. History has shown that nothing is so destructive to the stock market as widespread bankruptcies. Even companies that survive are hurt by seeing any of their suppliers, customers, or customers’ customers go bankrupt.
So… how does a disciplined investor know a bear market has occurred?
According to Professor Litman, credit is the “canary in the coal mine.”
For many years, miners used canaries to tell when there are poisonous gasses in the mine. They would carry the birds down into the tunnel with them, and if dangerous chemicals such as carbon monoxide were there, the birds would die. That would serve as a warning for miners to exit the tunnel immediately.
What did you notice in this story?
The canaries couldn’t predict hazardous chemicals when they’re not yet in the mine. They were only able to tell once they’re actually there.
This is a great analogy for the use of credit analysis in stock market investing!
A disciplined credit research cannot predict a stock market collapse. However, it can tell you when you’re inside one.
It’s part of human nature to want to predict the future. You want to prepare for what’s coming… but in the context of investing, predicting isn’t preparing.
You have to learn to react to the market.
Investing is about discipline and preparation. If you’re truly prepared—if you study and familiarize yourself with the stock market patterns, and build your knowledge about various investment strategies—you won’t be easily shaken by the ups and downs of the market.
Besides, credit is the canary that alerts you when and where you are in a bull or bear market, and the direction of the market’s patterns. By recognizing the difference between good and bad credit, you become a good investor.
We hope you learned a lot from the continuation of the fifth discipline of the investing giants!
There’s no research that could actually predict the markets. Based on a study of 150 years of stock market patterns, no one has ever systematically predicted market peaks ahead of time. Only a select few investors have repeatedly identified market peaks SOON AFTER.
Apply this discipline in your own investment strategy!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
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“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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