Dollars to Doughnuts

My son and I were on a road trip recently, and drove by a doughnut shop that was advertising two doughnuts for only $1. “DAD!” He turned to me, “We shouldn’t miss out on this deal! Two doughnuts for a dollar!”

My son was pretty convincing. We both ended up with doughnuts and I spent only one dollar. We weren’t planning on buying doughnuts, or even buying food, but it was a deal we both felt was worth it. Who passes up cheap doughnuts? Success!

In 2009 a client bought a really fantastic house in a neighborhood under duress. It was a brand new build, but the builder was unfortunately caught in the housing recession. Our client picked up a well-built, new home for a song. Success!

A friend went on an outstanding vacation in the Mediterranean this summer – the flights were less than half of the norm, and she cashed in on a quick seat sale. Success!

We just don’t want to miss out on a deal. We love deals. Deals on doughnuts, real estate, vacations – we’ll spend money we hadn’t intended to spend because the sale is that good.

Comedian Jim Gaffigan even offered up a funny line about encountering a sale on Big Macs, two for two bucks. He thought to himself, “I don’t want to lose money on this. I’ll take 80 of them.” Regardless of the product or service, we are always looking to buy at a lower-than-market price.

Except…. When it comes to investing.

Recently, for the first time in four years, the S&P 500 index experienced a 10% correction. How many calls do you think I received from investors saying, “Do you think it’s time to buy more?”

That’s right: zero.

I did however get a fair number of calls from investors asking the exact opposite question: “Do you think it’s time to get out?”

Successful investing is similar to success in any other kind of market. If you look at someone like Warren Buffet and other truly wealthy investors, they approach investing in the same way that we as Americans approach any other kind of purchase: they look for deals.

Less successful investors create the sentiment we saw earlier this year, which resulted in an over-valued equities market. For some reason, when it comes to investing, we want to buy when the price of something is increasing. When it decreases, we want to sell.

This behavior is counter-intuitive to everything we’ve been taught. We’ve all heard “buy low, sell high”. We’ve all heard, “Be fearful when others are greedy, and be greedy when others are fearful.” Yet the gut, emotional reaction of the typical American investor is to choose the exact opposite approach.

When it comes to investing, the emotions you feel are usually the opposite of the actions you should be taking. When you feel fear, you should look to take advantage of opportunities. When you feel greedy, you should look towards harvesting. That is how Buffet generates above-average returns. He takes advantage when others are fearful, and he buys when stuff is on the cheap. Just like most people do with everything, except their investments.

A rational approach and a strong methodology are the keys to success in investing. Sentiment and emotion attempt to drive investors out of the market at the exact moment that they need to be in it.

We’re seeking opportunities, and looking for great deals. After all, we don’t want to lose money on this.

- Greg Stewart, CIO