Interest rates will rise. Term deposits will become more attractive compared to shares. Companies will make more profit. The S&P/ASX200 (ASX: XJO) (^AXJO) will grow, over time. And the Australian dollar…well… who really knows.
All bar one of the above statements I couldn’t care less about. Can you guess which one?
Yep, that’s right, companies will make more profit.
Warren Buffett says so many investors focus too much time on what’s knowable and not enough on what’s important. Nobody knows for sure where interest rates, the Aussie dollar or the index will be in two months, two years or two minutes. But who cares anyway?
Successful investment strategies shouldn’t focus on what’s going to happen and when, instead they should focus on what’s important. For example getting to know the company you’re investing in.
If it’s got cash on hand, good management and produces a product with growing demand, why waste your time trying to know what’s knowable?
What’s important is focusing on buying companies which fit your overall investment thesis.
If your investment timeframe is long-term, your portfolio valuation will swing wildly as sentiment towards particular industries and trends change. For example, investors will turn away from dividend stocks to growth ideas, from the retail sector to mining and from facial hair to tattoos.
Regardless of the market cycles, you have to remember why you’re here: You’re looking to buy stocks and you want to make money. So don’t waste your time trying to jump in (or out) of the market with every rise and fall. It’s time in the market, not timing the market that’s important.
For example, I bought shares in Newsat Limited (ASX: NWT) when it was too expensive (or was it?). Since I bought in, I’m down (on paper) 10%. Think I care? Not one bit. It’s neither important, nor knowable to expect the share price would open today at $0.425 when I bought it six months ago.
Likewise, for shareholders who have witnessed Cash Converters International Ltd’s (ASX: CCV) share price fall by 50% in less than a year, it doesn’t matter. The company still pays a dividend better than interest rates and is growing rapidly.
As for the 5% fall in value of Bentham IMF Ltd (ASX: IMF) shares over the last six months, who could have predicted that? I didn’t. The litigation funder operates in numerous countries, but their share price has retracted while the USD/AUD movements should have, at least theoretically, benefitted it. Luckily I didn’t buy the shares merely for a play on exchange rates.
If you think interest rates are going to rise and bank shares like National Australia Bank Ltd (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) will fall, so do I. But they’re not deserving of a ‘sell’ merely because of interest rates, you have to look deeper, at the company itself.
It’s important to make your investing decisions based on facts and a long-term mindset. Don’t worry about what’s knowable, focus on finding important information and unearthing good companies which can weather a recession and provide an avenue for growing your wealth regardless of the market cycles.