Avoid the Troubled Waters of the Investment Sea


In his song “The Wreck of the Edmond Fitzgerald,”  Gordon Lightfoot offered this warning - “With a load of iron ore, 26,000 tons more than the Edmund Fitzgerald weighed empty. That good ship and crew was a bone to be chewed when the gales of November came early.”

Remember these words when you are about to launch your investment program. When the market is breaking into new territory and it looks like it will never end, many experienced investors liken it to uncharted waters.

Investing in Uncharted Waters

Building and protecting your financial nest egg is like sailing through uncharted waters. You create a strategy, back test it and are ready to launch when suddenly the whole market shifts in a direction nobody has seen before. It happens almost weekly during these turbulent times.

Investing in the stock market is a high stakes game and not for everyone. Benjamin Graham, widely known as the “Father of Value Investing,”  said there were three principles of value investing:

  1. Always Invest with a Margin of Safety - Well informed investors know there are always unseen currents below the surface and storms can occur with no warning. Plan your course of action knowing that “what can go wrong will, will go wrong.”

    Always have an escape plan or exit strategy in place for when the market heads in an unforeseen direction. There are storms and gales in every season and the wise investor learns to watch the wind and listen to every piece of information they can find.
  2. Expect Volatility and Profit from it – If there was one common theme that ran through world markets this year, it was the surge in volatility. In October of 2014, the Vix hit its highest level since June of 2012. The only certainty about investing is uncertainty.

    Volatility is only one indicator of many tools experienced investors have in their arsenal. Watch it like a sailor watches the weather and understand what it is telling you.

    Most value investors take volatility with a grain of salt. They are not influenced by daily fluctuations, but hold to their strategy of investing for value. Many times, the best opportunities to buy a devalued stock are when others are divesting due to extreme volatility.
  3. Know What Kind of Investor You Are – “To thine own self be true.” What are your long term and short-term goals? Are you looking for growth, value or some combination? How much risk can you afford? Are you are an “active” or “passive” investor. Do you need to be involved in watching every single tick of the market or are you content to sit back and watch trends.

    How you shape your portfolio depends on how you answer those basic questions. As the manager of your portfolio, you need a solid investment plan, a steady hand on the wheel and the discipline to follow your plan when the market heads in an unexpected direction.

A disaster at sea costs lives. A mistake in your investing strategy means you spend the rest of your life trying to recover.

The Value Investor Seeks Wisdom

Value investors look first at the underlying company. Is it a company that has a good business strategy that is in a good market where there is high demand for its products and services? Is the management team strong and experienced? Do they have a good plan for the future?

In his breakthrough book, Good to Great, author Jim Collins compared the long term records of nearly 1500 companies to discover that only 11 companies that consistently out perfromed their peers over a 15 year period. These 11 companies he called "great companies," were excellent for value investors because they delivered cumulative returns that out perfomed the general market at least three times over fifteen years.

He says, that "In each of these dramatic, remarkable, good-to-great corporate transformations, we found the same thing: There was no miracle moment. Instead, a down-to-earth, pragmatic, committed-to-excellence process—a framework—kept each company, its leaders, and its people on track for the long haul. In each case, it was the triumph of the Flywheel Effect over the Doom Loop, the victory of steadfast discipline over the quick fix. And the real kicker: The comparison companies in our study—firms with virtually identical opportunities during the pivotal years—did buy into the change myths described above—and failed to make the leap from good to great."

Not Looking for Quick Hits

Value investors are not in the market for quick hits. They are in it for the long haul and then learn from every move they make. Over time, they develop a knowledge base and the wisdom that only comes from experience of what to buy, when to buy and when to sell.

They do their homework and are constantly on the alert for undervalued stocks with good fundamentals. Just as beginning sailors must start with the fundamentals of learning how to read charts, the weather and the winds, beginning investors need a fundamental understanding of how the market works.

A value investor’s goal “is to find proverbial diamonds in the rough; that is, companies whose stock prices don’t necessarily reflect their fundamental worth.

Contrarian value- investing legend Marty Whitman, “advises those looking to build wealth to first invest in a good, well-rounded education.” He says that his courses in demography and Russian History helped him understand global politics, population flows, and the social interactions that foretell market movements.

Trust Your Instincts and the Experience of Others

More experienced mariners learn to trust their instincts. Experienced investors must do the same. The more you trade, the more you understand what moves the market, what influences overall trends, and how individual stocks react to market shifts and trends.

Lightfoot’s tribute to the mariners includes this line: “And the iron boats go as the mariners all know, with the gales of November remembered.” As an investor, you must develop a long memory and rely on others who have been in the market longer than you have. Although change is a constant in the stock market, there are many lessons you can learn by watching trends that develop over a long time.

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