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Get comfortable with investment losses, and gains.

I can distinctly recall asking a former employer’s investment gurus whether they delayed a stock purchase if the price rose unexpectedly. The response was, “of course not”.  I probed for some reasoning and was advised that every day the market value of any particular leading share is the product of thousands of purchase and sale decisions, each of which is analogous to a vote, a vote for the true value of the underlying business.  So, the gurus told me, irrespective of price movements, share prices are always at the correct value as they respond only to new information.  I was somewhat taken aback by this assertion.  It made some sense but not enough.

At the time, that was the best advice those gurus could give me. Since then, I am pleased to report, investment theory has enjoyed a revolution of understanding.

The effect of economic cycles on investments and what should be done about them is now understood. We understand that consumer confidence plays just as important a part in the day to day performance of economies as the confidence of business.

The most important driver of all for investment returns is the motive force that seems to come free of charge entwined in every living person’s DNA – the desire to make better tomorrow that which exists today.  People are incredibly resourceful and unstoppably motivated to make improvements.  While this factor is not a necessary precondition for investment returns to occur, it is the factor which ensures hardly any adverse event is enough to extinguish investment returns for long.

Rational and irrational influences combine.  Knowing all this, is it possible for a canny investor buy the rise and sell before the fall.  Occasionally, yes but mostly no.

In 99% of cases, good investment returns require patience and a medium to long term approach.  They require a disdain for short term losses and an understanding that good things come to those that wait.

Be very careful about assessing you attitude to risk and tolerance to short term losses and focussing on the latter will guide you to invest in a way which does not trigger an irrational sell response when short term losses occur.

Posted in Investments, Markets