Let’s call it a mental training exercise. Sports, they say, are ninety percent mental and ten percent physical. The stock market is much the same. Many believe success in the market is primarily attributable to stock picking, but I would argue that behavioral finance is as big or a bigger component of success. If the picks are good, but control over behavioral biases is not strong, success can be fleeting.
The last week brought a significant correction in overall market levels. We could be at the bottom of the correction or there may be still more to play out. While pundits will comment all day on the future direction of the market, no one really knows what the future will bring.
This is where investors should be making sure they have “connected the dots”. This means knowing when the market creates exceptional values and having the behavioral control to own those situations when the market is voting otherwise.
Having a “shopping list” of stocks and being intimately market familiar with their fundamentals enables a good equity investor to have a handle on what stocks represent great values when the price pulls back. These fundamentals include qualitative and quantitative metrics. What the investor seeks to benefit from is the market "throwing the baby out with the bathwater." Just because the overall market drops doesn't mean all stocks' future prospects sink commensurately. This is the analysis component of a good equity investor.
When an equity investor is well-versed in a stock’s fundamentals, they have a good idea when the ownership is a relative value. The next ingredient is having tight control over their behavioral characteristics to buy and hold against the views of the general market.
Keep your eyes open, a shopping list in hand and your emotions under control. There is gold out there in them hills, but you have to pan through a lot of rock!
Be safe, be smart, be prepared, be well read and be successful!
