Stop Looking At Your Investments

For many, investing is hard, but it doesn't have to be. Investing is hard because it involves money, and humans have two intense emotional drivers when it comes to money: fear and greed.

These two emotions, for most people, often lead to an irrational decision making process when it comes to investments, mainly: sell when things look bad and buy when things look good.

And that first decision can come back to haunt you (i.e. why did I sell Apple all those years ago?). I probably sold Apple because I saw the stock in free-fall on news that was perceived to be bad by investors.

What I didn't understand at the time when I sold Apple was the intense power of compound interest. How investment gains can build on top of more investment gains, enabling small investments to transform into significant investments overtime.

Having gone through the wringer a few times in the stock market, I have learned how important it is to ignore the news of the day and rampant market speculation, and instead invest in high quality companies for the long term.

Because when you own stock, you own a piece of a business, not a piece of paper.

There's an often told story in the investment industry that Fidelity once ran an internal study to see which of its account holders performed the best. The conclusion? Those who forgot they had an investment account at Fidelity performed the best. Whether the study is real or not, the conclusion is most likely true.

Investors who have been able to weather the bad times, hold on, and focus on the long term have done the best. And it's easier to weather the bad times by not constantly looking at the value of your investment account, especially during a market sell-off.

Because as bad as it may seem, humans have a tenacity to progress, adapt, and find solutions, which is hard to envision at a time of peak fear and uncertainty.

To set yourself up for long term success in the stock market, remember your long term plan and why you're invested in the first place, limit the number of times you look at your investment account (in other words, forget about it), and be mentally prepared for the next inevitable market correction.

Because it's 2020: cardboard cutouts have replaced fans at baseball games, wearing a mask has turned into a political debate, and the Nasdaq 100 Index has ignored it all and made nearly 30 new all-time-highs so far this year.

Tweet of the Week

To emphasize the opening message of this newsletter, I present the above tweet. Physical real estate doesn't sport average historical returns greater than stocks (it's not even close). But people tend to make more money in their own home than they do in the stock market over their lifetime.

The ultimate reason? Liquidity.

As a homeowner, you don't see the value of your home tick up and down every Monday through Friday from 9:30 AM to 4:00 PM like you do with stocks. This removes the temptation to panic sell during a market crash like in 2008/2009.

And homes are tough to sell in the sense that you can't click a button and instantaneously sell it. Instead you need to hire an agent and pack up and move out and find a new home to live in. This sticky environment and lack of daily/weekly/monthly volatility allows homeowners to partake in compound interest, albeit at a lower rate of return than stocks.

In other words, homeowners tend to "forget about it" and do well overtime.

Market Musings & Tidbits

What Recession?

New home sales have been booming amid the pandemic, as the exodus from big cities to suburban areas picks up steam. The housing boom bodes well for home improvement stores like Home Depot, which is also benefiting from a surge in home remodeling projects.

‍Americans Re-discover The Great Outdoors

Camping World has seen a surge in business as Americans ditch planes and instead hit the road for a summer vacation. Having driven 2,000 miles in the past week, I can attest to the surging number of RV's on the road.

‍The Importance of Diversification

There are multiple levels of diversification. Most broadly, it's stocks and bonds. Then, geographic diversification (US vs International). And then size diversification (large companies, small companies, and everything in-between). Dig a little deeper, and you get to company sector diversification (technology, health care, industrials, financials etc). The above chart shows the importance of sector diversification.

‍A COVID-19 Silver Lining?

One potential silver lining from the global COVID-19 pandemic is the steep decline of the seasonal flu virus, at least so far in the southern hemisphere. Australia has seen a 99% decline in seasonal flu cases, while Chile has seen a 95% decline. It seems that social distancing, masks and increased hand washing has helped slow transmission.

‍Logarithmic-Scaled Charts > Arithmetic-Scaled Charts

One way to remove emotion from investing is to look at stock charts. As a Chartered Market Technician (CMT), I utilize stock charts to monitor markets and gauge investor sentiment. The chart above helps illustrate why a log-scaled chart is superior to the often defaulted arithmetic scaled chart.

Both are charts of Amazon's long term price history, but one looks parabolic relative to the other. It would have been difficult to buy Amazon in 2015 if all you saw was the chart on the right.