The principles of successful long-term investing have been known for centuries. Mainly, buy good quality investments at attractive (or at least reasonable) prices.
Who hasn’t heard of “buy low and sell high?”
Unfortunately, that’s the exact opposite behavior of what most investors do over the course of their investing years. When markets and prices are low, they are fearful and refuse to buy believing that there is no hope for future gains. They are full of fear. Yet when markets and prices are high, those same investors chase unsustainable returns as euphoria and exuberance kicks in and it appears that everybody is making free and easy money. They are full of greed.
There has been no shortage of warnings on the valuations of the U.S. equity markets for the past few years. Yet, as prices soar, so do investors enthusiasm for paying ever higher prices.
Back in 1999 and 2000, investors experienced the technology bubble. It was one of the greatest bubbles in financial history. It seemed so painfully obvious in hindsight as to what was surely to result. Technology stocks were often trading at over billion-dollar valuations and many of them had little to no revenues and little to no earnings. Many of these stocks were trading at price/earnings multiples exceeding 100. Today, those valuation levels appear to be child’s play. How could investors forget these same lessons less than 20 years later?
Netflix, a current darling of Wall Street is trading this Thursday morning July 26, 2018 about 16% lower than its peak set early this month. It still has a P/E ratio of over 152. It also has massive amounts of corporate debt and an eyebrow raising debt to equity ratio of 185.52%. The profits better start coming in and quickly because at some point, they must pay back the loans (plus interest).
(Source: CNBC.com)
Amazon, which is a great company and certainly a disruptor in the economy, is trading at a current valuation earnings multiple of 293.81. This is on a company that has been in business for multiple decades. Investors won’t give up hope that “someday” the profits will come in to justify the valuations. Imagine it this way. Pretend for a moment that you had enough money to buy all of Amazon for yourself. You bought every single share of the stock becoming the 100% owner. This would entitle you to keep all the profits for yourself. What this means is that if you were entitled to all the current profits, it would take you 293 YEARS to re-coup your investment back from the profits. Does that sound like a reasonable investment for your future retirement?
(Source: CNBC.com)
Last night, another Wall Street darling, Facebook (FB) lost 24% of its value in after market trading when it missed earnings and lowered their forecasts. Think about that for a bit. How would you feel if you lost 24% of your lifetime savings within a few hours after the market closed and there was nothing you could do about it? Is that the type of risk that is appropriate for your financial security?
(Source: CNBC.com)
Corporate debt levels are at unprecedented levels. This is happening while stock valuations are at extremes.
Now I could jump up and down, wave signs, point to history, and warn investors as to the fire that they are playing with regarding many of these technology stocks. But it doesn’t matter if it is technology stocks, Bitcoin, or any other bubble. The warnings are most often ignored. Until it’s too late. Until investors make the exact same mistakes that investors made during bubbles of the past. Until investors lose their money permanently. Until investors try and blame anybody and everybody for their shortcomings and losses.
You see, investing is simple, it just isn’t easy. It’s quite hard to stay disciplined when craziness surrounds you. It’s hard to stick with proven principles when those principles seem too boring, or not applicable in a short time period.
There are many investors who have been participating in many of these Wall Street darling stocks that had what is called “FOMO” which stands for “Fear Of Missing Out.” They didn’t want to miss out on the action. They couldn’t help but chase what appeared to be easy money and big gains.
There are other investors who stick with proven principles. They stick to the basics. They stick to what has worked over decades, and centuries, and stick to what will continue to work into the future. Those investors didn’t have “FOMO”, but they may soon have what is called, “JOMO” (The Joy Of Missing Out). Those investors aren’t waking up to double digit losses. Those investors aren’t watching their companies wipe off tens of billions of dollars in market capitalization in the blink of an eye. It was these types of investors who didn’t have to live through the agony of watching the NASDAQ crash 82% back in 2001. They preserved their wealth and took advantage of the bargains that ultimately followed the crash in the rest of the market.
Prudent and successful long-term investors know that markets work in cycles (even if the cycles can last longer than expected). Prudent investors know that markets and valuations revert to the means. They know there are limits to debt accumulation and there is always a day of reckoning when loans must be eventually paid back (plus interest). They know that stocks can’t climb to the moon and beyond in some sort of fairytale.
Prudent and successful long-term investors know that cycles go both ways. At times markets can be greatly over-valued and at times they can be greatly under-valued. They know that most other investors act on emotion, greed, and ignorance. Successful long-term investors know that this is their edge in the markets.
There is no better time to be pursuing a debt-free and healthy life than right now. Whether you realize it or not, you are surrounded by nations, states, municipalities, corporations, and individual households that are in very fragile financial circumstances because of their debt levels. Extreme debt levels lead to less future choices and alternatives. It means that more future income will need to be siphoned off to pay principal and interest, which means less to spend on discretionary items. More debt means less freedom. More debt means more stress. More stress means more health problems. More health problems means less productivity and increased medical bills. More debt leads to a trapped situation with few alternatives than becoming a slave to the lender. Now is the time to move towards a debt free life and healthy life.
Don’t be the foolish investor. Be the prudent investor. Buy quality investments at reasonable prices. If markets can’t or aren’t temporarily affording you that opportunity, use patience, especially when you know you are a long-term investor. Markets are like the weather. They go in seasons. Soon enough the weather shifts, and it will be sunshine once again. Just don’t allow yourself to die during the winter.
Winter is coming…and there will be a lot of money to be made when valuations become much more reasonable. Will you be ready?
Good habits lead to good behaviors. Good behaviors lead to good decisions. Good decisions lead to a good life. Live by principles and choose wisely.