Hope Is Not Part Of My SWAN Strategy
- As a true “value investor”, I’ve learned to take the emotion out of the investing process.
- Fundamental analysis is the best strategy for me, and it allows me to take the guesswork out of the investing process.
- While others are out sweating over the “market cycle of emotions”, I will be tucked away firmly in my bed counting sheep.
I expect that most serious investors (meaning, my readers) are well aware of market cycles. And often, how they feel about the market also runs in cycles. This chart, “The Market Cycle of Emotions”, best illustrates and identifies how investors may be feeling during points of the market cycle.
A few weeks ago, I was reading comments on Seeking Alpha, and one of my valued readers, RoseNose, said she was “hoping” for the best. As Richard Russell wrote in one of his Dow Theory letters…
“Any time you find yourself hoping in this business, the odds are that you are on the wrong path – or that you did something stupid that should be corrected.”
“I have seen a lot of hopes ending in disasters simply because people made mistakes in buying bad businesses or expensive stocks, and then hoped that a tooth fairy would absolve them by taking the prices higher!…
“Unfortunate it may sound, but hope is a big money-loser in the investment business. It is hope that keeps you from selling your losing stocks. It is hope that stops you from cutting your losses before they get bigger. It is hope that leads you to buy good businesses at super-expensive prices.”
“But please… please don’t HOPE! Avoid it! Instead, embrace patience and reality… however painful it may be. And finally remember this – there are many good investing strategies: buying cheap stocks, buying high quality businesses, turnarounds, top down, bottom up, to name only a few. Hope is not among them.”
As a true “value investor”, I’ve learned to take the emotion out of the investing process, and instead, rely on data and reasoning. That’s not to say I don’t embrace my “gut feelings” for a stock – after all, I minored in psychology (over 25 years ago), while majoring in business (at Presbyterian College).
However, fundamental analysis is the best strategy for me, and it’s one that allows me to take the guesswork out of the investing process. “Hope” is not part of my vocabulary. As Benjamin Graham said:
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.”