Risk, Gain, Loss, All Four-Letter Words
Four-letter words have a clouded reputation. “Good authors, too, who once knew better words/Now only use four-letter words” (Cole Porter, Anything Goes) Unfortunately, many investors view “risk” as a four-letter word to be avoided without making the effort to assess potential gains that may outweigh their perceptions of risks.
In the stock market, no one knows which way any stock price will go next so that perceived risks are often anxieties rising from uncertainties. For many, avoiding uncertainty takes the place of assessing potential gains and losses. Bankers speak of customers who keep large deposits in demand accounts earning almost nothing. They explain that they avoid putting money into stocks for fear that their prices may go down.
This reflects the exaggerated aversion to losses that plagues many investors. Studies show that the pain of a prospective loss outweighs the pleasure of possible gain by as much a ratio. This extreme loss aversion could lead to rejecting flipping a coin for a two-dollar win against the prospect of losing a dollar.
With inflation slowly returning and the Federal Reserve in the initial stages of meeting this trend through interest rate increases, the apparent safety of bonds is an illusion. Regulations require many institutions to confine their investments to government bonds. While U.S. Treasury bonds provide an assured return this certainty comes with a price.
Their safety invites attention in the face of troubling events and anxieties after cancellation of proposed talks with North Korea brought buying into the bond market, lowering the yield on the 10-year Treasury to slightly under 3%.
Exxon Mobil (XOM-$80) stock currently yields 4%. It operates in a competitive and volatile industry, yet has managed to increase its dividend for 35 consecutive years. Ant individual investor who prefers any bond, whether government or corporate, in today’s economic and market conditions is accepting an inferior investment through fear.
Naturally, all investors should develop some liquid reserves before committing to stocks, if only to help them resist the financial media’s preying on their emotions. Turning off the TV and your computer will not only reduce financial stress and anxieties but will probably improve your investment returns.
This improvement avoids something called “myopic loss aversion,” which stems from our innate hate of losses more than our love of gains coupled with our inability to keep looking to see how our investments are doing.
There is proof from Israel where a regulatory change prohibited mutual funds from publishing returns over any period shorter than 12 months. Before the change, one-month returns were prominently reported. The investors didn’t change but their results improved as trading volume declined and investors increased allocations to more volatile and more profitable funds.
Odysseus had the right idea, having his crew tie him to the mast so that he could withstand the alluring songs of the Sirens. The late Sir John Templeton, who managed stocks so well that he gave over $1 billion to charity, avoided the Sirens of Wall Street through patient attention to fundamentals. He attributed much of his success to maintaining an elevated mood, avoiding anxieties and remaining disciplined.
Divorce from obsessing over news of short-term market gyrations is particularly important for retirees who may be sitting in front of the television, not a very rewarding “activity” for years of hard work. There are plenty of attractive stocks available, among them RoyalDutch Shell (RDSA-$69) and ConocoPhillips (COP-$68) who are benefitting from surging oil prices. Apple (AAPL-$188), Amazon (AMZN-$1,608), Nvidia (NVDA-$248) and Visa (V-$132) lead their sectors. Economic growth is finally picking up speed after several stagnant years and the industrial sector is developing momentum. Celanese (CE-$113) is an excellent value with surging earnings. Other buys in this sector include DowDuPont (DWDP-$66) and Danaher (DHR-$102).
No column for three weeks while I will be following the course of Odysseus in the Aegean. Preferred e-mail:
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622