Sunday, 3 July 2016

Do not let anxiety prevent you from taking action

Exaggerated fear is, more often than not, a mistake. If you act prudently, every period can be good to make financial commitments to secure your future. When bad news and pessimism reign (such as it happened last week), those are times of great opportunity to purchase shares of solid companies at low prices.

Excessive fear

Stories of financial collapse reported by the media in the last decade have scared many people out of the stock market. At the time of writing this, you can hardly turn on the radio or open a newspaper without learning about the upcoming financial crisis.

However, in investing, like in everything else, realism triumphs over exaggerated anxiety and worry. Gloomy forecasters seldom look objectively at facts. On many occasions, share-holders would be better off if they just keep a cool head, and avoid liquidating their stocks at fire-sale prices.

The first step to develop self-confidence as an investor is to realize that nobody possesses the ability to predict exactly when shares are going up or down. There is no magic formula for successful investing. The best you can do is to strive to keep well informed, make rational decisions, and focus your eyes in the next decades.

Whenever a period of inflation or deflation starts, some gurus will claim that they had predicted what was going to happen, but these are often the same persons who had previously made many wrong predictions. A broken clock gives you the right time twice per day, but cannot provide you accurate time measurements. You really need to think for yourself, and make your own decisions.

Patience and foresight

Reason and realism constitute a superior approach to making investment decisions (and all sort of decisions in general). If you want to develop self-confidence as an investor, you have to remind yourself every day to have patience, and keep looking ahead. Ignore short-term volatility and look at the big picture. Ask yourself where the world economy is headed for in the next years.

You need to move your focus beyond the next quarter, and see what the whole year will look like. Look for companies with a strong international presence. Even in periods of generalized gloom and doom, many countries continue to grow at a good speed.

Conservative investors tend to prefer enterprises that operate in stable markets, in particular if their dividend is maintained or increased. At the same time, risks can be minimized by investing in corporations, such as pharmaceuticals, that have world-wide distribution for their products. These enterprises often purchase licenses for new medicines from small laboratories and universities in order to distribute those medicines internationally.

Rational expectations

How can you increase your confidence in making the right financial decisions? First, you have to realize that you do not need to know everything in order to become a good investor. In order to succeed and increase your self-confidence as an investor, all you have to do is identify well-managed companies whose shares are priced attractively. If their products meet fundamental human needs efficiently, chances are that those businesses will continue to do well in the future.

Indeed, unexpected problems might come up next week, and make your shares go down. When it comes to investing (and to most important decisions in life), a certain measure of uncertainty is part of the game. 

A claim of infallibility is something that you should leave to those who believe in magic. Yet, as a general rule, rationality works much better than magic, in investment and in everything else. A important part of rationality is accepting that you will make some mistakes along the way, and that you should not engage into endless self-recrimination.

Make your investment decisions (and all other important decisions in your life) on the basis of rational expectations.  Research the facts, think for yourself, try to make good choices, and stop worrying about the future. 

If you diversify your portfolio and buy shares of companies that operate in countries with good prospects of economic growth, you should be able to profit from the increasing prosperity around the world. Do not let anxiety and worry slow you down. Take constructive action. Let the pessimism to those who let their lives be driven by exaggerated emotions.


Image: photo of antique sculpture taken by John Vespasian, 2015

For more information about rational living, I refer you to my books

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