Duck and Cover

Duck and cover was a method of protection during a nuclear attack during the 1950s at the height of the cold war. The bomb goes off, everyone dives under their desk and hope the fireball won't set them and their desk on fire. How does an investor duck, cover and survive the market equivalent of The Bomb? The good news is, this isn't the bomb (think 2008). The better news is that you can survive if you are able to be rational, not emotional.

As of the writing of this article the Dow Jones Industrial Average is -7.2% year to date (YTD) and the S&P/TSX Composite is -4.4% YTD. The media is reporting this with terms like "plunge", "rout", "devastated". With terminology like this, it's hard not to feel fear. But let's catch our breath and look at things with a clear head.

On June 10, 2015, CNBC ran a story about how Chinese stocks are nearly 25% overvalued and made the argument that the Shanghai Composite Index is in bubble territory. On the very same article you have a link to an article titled "Why US can rally while Shanghai stocks get smoked." The Shanghai Composite Index was -16.7% in the first eight trading days of the New Year. On January 10, George Soros says we are going into another 2008. Two days later the Financial Post printed the following article, stating that everyone needs to "sell everything". So, it's time to panic, right? Not according to Blackstone founder Stephen Schwarzman in a January 13 article from The Australian. So you're thinking, Great, now what do I do?

First, ignore the daily news. Sometimes it's correct, sometimes not butwhen predictions are no better than chance, I would suggest not to bother watching. Secondly, if you're feeling the walls of the markets closing in on you go outside and take a breath. Once you're calmed down, look at how investments are valued. If they're discounted and you don't need the money to pay your bills, relax. If you have money to add to your portfolio, do so.

Investors have to remember that when you purchase stocks, you are buying shares of a business. It is true that traders emotions will make short-term values swing wildly and create anxiety, but don't forget that there are real businesses behind the numbers flashing on your computer screen.

Let's look at two investing legends, Warren Buffett and the aforementioned George Soros and see how their styles differ.

Buffett is a value investor, always looking for companies that are much lower than their intrinsic values. He buys them and waits for the price to rise. "Be fearful when others are greedy and greedy when others are fearful," is his motto and he has the ability to suppress emotion when making investment decisions. Investing can be easier if you are able to remove your emotions from the equation and investors can easily lose money if those emotions make your decisions. This is easier said than done during a sell0ff when you might be ready to put your cash in a coffee can. 

Soros' style is very different and is known as "reflexivity". A Forbes article describes this as a social theory, adopting a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market. Are you still reading after that explanation? Good for you. Simply, Soros relies on volatility and leverage to make his money. He's a speculator. 

My bias is towards the Buffett style of investing. At no time do I want to speculate with my clients’ money. If I'm wrong, I want to be wrong on timing, whereas I want to be correct on the quality of the investment. It's my belief that investors should have the same mindset and will ultimately survive with their investments intact if they are able to manage their emotions.

Sources: CNBC, Financial Post, The Australian, Forbes, Investopedia, Financial Review