Maintaining Your Investing Discipline (When Others Aren’t)

July 5, 2013by Hoy Grimm0


The June swoon is upon us. In late May the Federal Reserve warned investors that they would begin to unwind the financial stimulus that they have added over the past five years at the end of 2013. Amid a new European recession, Chinese growth stagnation, suspect employment trends domestically and flat corporate earnings, investors view the quantitative easing measures by the Fed as a necessity for higher prices.

Against this backdrop, the Fed’s unwind announcement was equivalent to yelling “fire” in a crowded theater. Investors panicked at the thought of life without artificially inflated prices. As the panic spread Interest rates increased at a historically unprecedented pace, gold lost more than 20 percent and the stock market dropped close to 10 percent. As you check your accounts online or wait for the mail to come, you’ll feel it this month.

Even the most disciplined investment approach won’t completely insulate you from widespread market disruption like we have seen recently. Operating from a clearly defined investment process, though, should give you the opportunity to take advantage of other investors’ lack of discipline. Our investment process begins with a thorough analysis of the steady stream of economic and financial indicators. This analysis led us to reallocate our bond holdings from long maturity bonds to shorter maturity and adjustable rate bonds this spring. We also pared our exposure to stocks as earnings and profit margins came under pressure. In late June we reallocated money into some bond sectors that were down more than 10 percent. We remain very cautious on stocks until we see better news on earnings and profit margins.

We share our investment techniques in this column to help you define your own process. Our previous columns addressed many of the issues that investors panicked about in June. Being early isn’t fun or easy. You will second guess yourself, and, worse still, have to endure the talking heads on television telling you how wrong you are until you are proven right. At that point, you get the pleasure of using your discipline to make money from investors who lack it.

Panic is the moment disciplined investors wait for. Warren Buffet has become an investing legend this way. At the end of March his company had amassed more than $44 billion dollars in cash and his insurance (the majority of Berkshire Hathaway’s assets) subsidiary’s investment portfolio was 57 percent stock and 43 percent bonds and cash. It is safe to say that Warren was waiting for a day when prices were lower before he put that cash to work.

Hoy Grimm

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