November 12, 2016

Portfolio Update November 2016 and How to Deal With Potential Major Turnaround Events

Note that, as usual, you can expect our next update in about 12 weeks or so, in February 2017.
Meanwhile, you can also have a look at our actual portfolio and previous portfolio updates here:

After a tough start to 2016 that provided some interesting buying opportunities and a moderate rally afterwards, markets and by the same token, our DIY Portfolio kind of have been struck in neutral lately. Historically, stock values that don’t go anywhere and are stagnant for a while are often a sign that something big is coming. So a bold movement could be expected but the problem is that you never know in which direction it will go. Is it going to be way up or way down? Nobody can tell…

As with any typical stock market year, 2016 has been fertile with potential important turnaround events. At least for now, the initial hype surrounding the surprising Brexit vote went away.
But before the end of the year, nervous investors can anticipate at least two other major huddles: the probable Fed interest rate hike and a monster one, the US Presidential Election and its possible effects on the world as we know it. Change is often good and should be welcomed but even if it would probably be awesome to provide buying opportunities, nobody should wish for chaotic change when it’s evitable (Note that this text was written before US Election Day but actually published a couple days after).
So, what should we do about all these preoccupying circumstances?
Once more, I’ll remind you that I am not an investment or tax professional of any kind. The intent of this blog is not to give specific investing advice. Before investing yourself, we suggest you to do all necessary research and consult a licensed financial professional if need be. 

The Waiting Game

My answer may seem a bit repetitive and I apologize in advance for the boring recurring theme. But doing nothing is exactly the point and playing the waiting game may naturally be our best option.

As some of you know by now, our strategy in these kind of turbulent times is to simply ignore short term gyrations, to buy stocks when interesting opportunities arise and to patiently wait for our portfolio to grow in the long haul.

In theory, our easy investing principles are simple to apply. In the heat of the moment, or moments might we say, it’s a completely different ball game. Our patient nature sure helps but we still have to resist letting emotions take over and selling or buying in a sudden rush of fear, greed or panic.

The only practical way we permit ourselves to bend our investment rules is to sometimes wait a little longer before actually buying stocks. In our last update, we explained Why we are holding on to more cash and the conditions remain somewhat the same. You will note that our Dip Factor average is still quite low at 1.62 (Average Dip % of 8.45%).

In retrospect, maybe we are not really cheating or bending our rule because our actual investment rules suggest buying stocks on opportunity and not to blindly buy stocks when we have money on hand.
So in the present context, we are still content to calmly wait for better prices and buying occasions. Maybe we won’t have to wait that long with the upcoming US Election.
You’ll notice form our usual chart that we are still steadily going in the right direction:
The alternative to our doing-nothing-special approach would be to try to guess the next direction of the markets and to act accordingly. Let’s try to make educated guesses…

Some more optimistic foretellers could argue that, after 2 so-so years, markets are due for a rise, that the economy is doing fine, that Hillary Clinton will be the first woman elected president and that things will continue to get better.

But other pessimistic fortune tellers could convince you of exactly the opposite.

The truth will probably fall somewhere in between but in the end, the problem is that nobody can really predict what the markets will do next.

So, what’s the secret of successful long-term investors?    

How Successful Investors React To Potential Turnaround Events

The way you react to these major and potentially catastrophic events will probably define you as an investor and determine if you become a successful one or not.

An old friend, also rich and wise I might add, once told me how to react as a successful long-term investor. He resumed the sacred approach to 3 basic rules:

First, never anticipate.
Second, the possibility to buy only exists if the markets went down.
Finally, the possibility to sell only exists if the markets went up

So, he would never buy or sell in anticipation of such events. After the fact, he could possibly buy or sell by adjusting to the magnitude of the positive or negative reaction of the markets.

His masterful approach avoids the stress of predicting the direction of the markets. His only job as an investor is to react after he can analyze all the facts. It doesn’t really matter if the news is good or bad, the only important fact to consider is the reaction of the markets.

Simple enough, these rules curiously resemble the classic and still true adage: «Buy low and sell high». Again, all this is very easy in theory but much more difficult to practice. At least make it a point of honor to avoid selling when markets went down or buying when they went up. These foolish options should never even be considered.

A while back, as we also believed in the long term perspectives of the markets, we decided to adopt a similar approach.

The only luxury that we are permitting ourselves is, as we discussed earlier, to hold on to some extra cash to profit from potentially more interesting buying opportunities. That reserve is only built up by dividend payments and new contributions. We would not sell existing positions to supply such reserve that never represents a large portion of our portfolio (always less than 10%).

To this day, we still think reacting without worry after the fact to major events is really the best course of action to remain successful long-term investors.

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