There is a lot going on, right now.
Market volatility.
101 days of a new (well, returned) US President.
Inflation falling (and maybe rates, too).
And an election in a few days.
That's a lot for an investor to get her head around.
Except… it's not. Not really, anyway.
Don't get me wrong – I'm not saying it's unimportant or that the vast number of permutations of the above don't take up some serious mental space.
I'm just saying it's not that important, from an investing perspective.
You've probably heard of the Pareto Principle. Or, if you don't know it by that name, the 80/20 rule.
The basic idea is that in any endeavour, 80% of the result comes from 20% of the effort. Or, more broadly, from 20% of the input.
It's my contention that, other than in some very specific cases, the long term returns from investing are very unlikely to be materially impacted by anything I listed above.
Market volatility? Happens all the time. It's the ticket to the dance.
Politicians? Sometimes, for some companies, for some period of time. But name me a successful company that's continued to be successful based on the person living in The Lodge or The White House.
Inflation? Economic growth? Sure, we'd like less of the former and more of the latter, but if your company relies on an economic decimal place, I'd suggest it's not the sort of business that belongs in your portfolio.
The problem with all of the above, though, is that not everyone realises it. And not everyone has the emotional fortitude to look past, or through, all of the noise.
That's why we have volatility in the first place.
Irrational exuberance. Unjustified pessimism. Both have always been with us, even if not at the same time.
And because humans like to find meaning, we try to rationalise everything, and find reasons. If we can't, we turn to the modern (would be) oracles, asking economists to tell us what'll happen next, so we can process the uncertainty.
Understandably, of course.
But also, wrong and counterproductive.
As investors, we are part-owners in businesses. And that is the most helpful lens through which to consider what's going on right now.
If you ran a successful local cafe, you'd want higher economic growth, of course. You'd prefer lower inflation, and you'd like a government that was going to do things that made your cafe more prosperous.
But if you got the reverse, you wouldn't offload your cafe for 10%, 20% or 30% less than what it was worth, just because you were worried.
You might have to make some menu changes, for a bit. You might have to look a little closer at the staffing roster. But if you were good at your trade, you'd make the best of it, while you waited for better times to return.
And, in all likelihood, you'd emerge stronger, as the weaker and less successful cafes fell by the wayside.
More importantly, you wouldn't obsess over the official employment figures, or spend all of your time on the internet thinking about US or Australian politics. You'd get on with running your business.
You'd focus on doing the 20% of things that deliver 80% of the result.
It's how investors should approach their craft, too: we should think like business owners; and take a long term view.
It doesn't matter if the RBA cuts next time, or the time after.
It doesn't matter what short-term fallout there is, electorally.
(There are exceptions, of course, where policy directly and materially impacts long term profitability… but those things are rare, and company-specific.)
The 20%?
Things like the quality of the business. Its financial health. Growth prospects. Leadership. Industry position. Valuation.
Those are the things that'll drive the vast, vast bulk of your returns.
They're the Pareto factors.
The other stuff is – from an investing perspective, at least – almost all noise.
Speaking of separating the signal and the noise, this evening at 8pm AEST, I'm joining Motley Fool Australia's General Manager, Adam Surplice, for another edition of Motley Fool TV – an hour of (free!) live-streamed investing content.
Yes, we'll talk policy – it matters, for the country, if not directly for our portfolios – as well as the opportunities thrown up by the panic of others.
And we'll take your questions – again, live – and answer as many as we can in the time allotted.
So… you can doomscroll Twitter, turn your brain to mush with reality TV, or you can join us (maybe with a cheeky mid-week beverage in hand) for an hour of investing information, education and interaction.
(Hint: I think you should do the latter!)
Just click here, or on the image below, to join us at 8pm AEST tonight.
Even better: if you do it now, you can ask YouTube to remind you when we're about to kick off.
See you there, Fools!
Fool on!
