Vol II, No. 4  

May 2014   

A monthly commentary for investors and their advisors about how the quirks of human behavior

drive investing...and what you can do about it

Forecast: Cloudy With a Chance of Prosperity 

Through the miracle - at least to this technophobe - of technology  I'm typing this on my cell phone while sailing eastward toward St. Petersburg, Russia. My wife and I - along with 2,000 other close friends - are on day 3 of a 12 day Scandinavian cruise. Additional stops include Helsinki, Copenhagen, Stockholm and Amsterdam.  So far it's been cloudy with occasional rain.

After banging this out, I'll send it via satellite to our office in the U.S. When I'm done, the message will be stored on our "virtual server" or what is referred to nowadays as the "cloud".  Which for some is a "hot" investment concept today. 

But I'm more interested in everyday, real life clouds. No, not the ones currently hovering over our cruise ship. Nope, I'm speaking of the clouds that can hover over your investments.  What, you say?  Why would I want clouds over my investments?  You don't. At least you don't want the kind that are like a bad relative who shows up at your door and won't leave. But temporary clouds have some advantages when selecting investments.

You see, most investors are seeking the same thing: quality, sustainable long-term investments. And many investors can identify quality companies run by good managers. Therefore, these companies tend to be valued appropriately, or at least most of the time. No big bargains here. Since we're trying to perform better than the masses, if we select these fairly valued companies we'll likely get "normal" returns. So we need an extra ingredient to add to the mix.

Cue the rain.  Or at least some big, black clouds.  You see bargains don't just happen. It usually takes a general market decline, or company-specific event to push prices down and create buying opportunities.  When we see this, we put on our rain gear, grab our umbrellas and go to work.  

Of course others try to do the same. So we must start with sufficient knowledge and experience. With an added helping of patience.  Make that a large helping of patience.

Eventually the temporary clouds lift, the sun comes back and investors fall in love again with the former black sheep. It's pretty simple but it works. The key is having the ability to distinguish between short-term, fixable issues and more serious long-term quagmires.  

And of course having one more thing: PATIENCE.  Large doses of patience. Patience to wait for improved results. Many investors simply won't wait around for several years - or more - for better results. This neglect creates a vacuum of demand and depresses valuations. Into the vacuum we step.  

As I'm finishing this the sun is starting to break through the clouds and shine on the Baltic Sea. It looks like a glorious day ahead on the high seas. Just a little bit of patience and better sailing days are on the horizon. Just like the stock market. With nonstop buffets included.  

-John Heldman, CFA