Don’t let sentiment dictate your investment behavior

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Change, already moving at a breakneck pace, has accelerated considerably since the start of the COVID-19 pandemic. Whether it’s our relationship to the office, our reliance on technology or crazy prices for daily necessities, everything seems more volatile and unpredictable.

All this uncertainty and change affects our emotional state, and that has translated into dramatic shifts in public markets this year, which are mostly down. There are solid reasons for a market correction, including the war in Ukraine, runaway inflation, ongoing supply chain issues and many more. It also wasn’t clear that the lofty multiples being ascribed to many companies, in particular technology ones, were warranted.

It’s all led us to what looks like the inevitable conclusion of a historically long and strong bull market. The pace of the declines in public markets and occasional recoveries in the past six months has been incredible. Technology makes trading fast and easy, and algorithmic trading can exacerbate what might otherwise be smaller adjustments, but I think sentiment plays an even bigger role. Feeling worried or frustrated, investors seem willing to trade stocks quickly and frequently, often based on emotion. Sentiment clearly drives markets, but it is less clear that it accurately forecasts where the economy is or where it is going.

There is a deep need for facts to win out over feelings. Whether that comes to politics, science or investing, making decisions based on data and truth is a winning formula, one that makes it easier to sleep at night, even when there are reasons to toss and turn. Caution is never a bad thing when making big decisions, and it is hard to sleep on it when you can’t sleep at all.

I’m far from alone when it comes to a long-term, value-based approach. It is a simple formula that helped make Warren Buffett a billionaire. It’s wise to remember just how great public markets have done over the long haul. While volatile markets can, as Buffett says, show who’s been swimming naked when the tide goes out, they also present savvy investors with opportunities and allow wise investors to demonstrate prudence and patience.

That’s not always easy in a profoundly unsettled and unpredictable world, but history suggests that long-term thinking is highly effective. At this writing, the S&P 500 is deep in the red for the year but still up more than 60 percent over five years.

In my world of private equity, the long term is all there is. We typically hold companies for about five years, with limited opportunities for earlier liquidity. No one knows what the world will look like in five years, so it’s imperative to invest in companies with incredibly strong fundamentals that can survive and even thrive in challenging environments. The same holds true for any investment. Success that lasts is neither built on a gut feeling nor frittered away in a panic.

It’s taken some painful lessons to get here. After more than 40 years of investing, I’ve lived through deep recessions and once-in-a-lifetime events like the 2008 Global Financial Crisis. And I never thought I’d see a major land war in Europe, especially in tandem with a pandemic. But here we are again with crises aplenty.

Staying calm is challenging, especially when your portfolio is getting battered. But if you’re on the ledge, step back and take a breath. Don’t let sentiment dictate your investment behavior either in unduly frothy or frugal markets. The more turbulent the moment, the more the risk that sentiment takes over. Remember that no matter what comes next, this too will pass. The market will march forward, and so will companies that generate real and lasting value. ●

Stewart Kohl is Co-CEO of The Riverside Company

Stewart Kohl

Co-CEO
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