Market crises like the oil crash can remind us of valuable lessons:
- The market changes abruptly. Never count on analysts and economists to call a major turn in the market. It’s unpredictable, can happen fast and there’s too much career risk in guessing it wrong.
- The market is cyclical; just about everything is affected by economic activity and changes in supply and demand. Remember to zoom out and look at the larger patterns.
- Always diversify. Too many investors diverge from their diversified asset mix and jump into trends, but making a bet on a secular or cyclical trend has to be done in the context of a diversified portfolio.
- Focus on full cycle returns, not 3 or 4 year runs. As Warren Buffet has said, “You only find out who’s swimming naked when the tide runs out.” Make sure your CEOs and portfolio managers are fully clothed at all times.
- The highest yielding stock is not necessarily the best investment. Dividends aren’t a risk control measure, nor are stock yields a valuation tool. For dividend investors, the path to good returns at a reasonable risk is not the highest yield but rather a portfolio of dividend-paying stocks trading at or below what they’re worth.
- The market is prone to overreacting to short term news and economic trends, resulting in low valuations and more importantly, opportunity. Crises are invaluable for strong returns for those with the discipline to buy low and sell high.
Credit to Tom Bradley’s Absorb these six lessons from oil’s collapse, Globe and Mail, 17 Feb 2015