Ignore the Noise When Investing
I recently had a conversation with a close family friend. It was hands down one of the best conversations about investing, risk management, and how to be opportunistic I have ever had. So, I thought I’d share it with my Lombardi Letter readers. I believe it could provide some value to you.
Before going into details, here’s a little bit about my friend. He has built the majority of his wealth by running small businesses and then selling them, investing in real estate, and investing in the stock market.
I have known him for most of my life (he’s much older than me), but until a few days ago, I had never really had a chance to sit down and talk to him about money and investing.
The conversation began with us simply chatting over dinner about what’s happening with the United States and China. I took the argument that the current situation is problematic and that it could hurt the global economy.
Not going to lie, I expected him to agree with me instantly. Why? Because, if you think from a global level, a trade war between the U.S. and China could lead to a lot of problems. This is the sentiment prevailing across the board.
Instead, he said to me: “You are paying too much attention to the noise. Don’t do that. It gets you nowhere. I have always been disappointed whenever I listened to the noise.”
Taken by surprise, I asked, “So, you are saying nothing will happen?”
“I never said that,” he replied. “The two biggest economies in the world are fighting over trade. It will definitely create trouble.”
He explained, “You have to understand, what President Trump tweets and what the Communist Party of China does is way beyond average investors like you and me. We don’t have a say in that whatsoever. But we can adjust accordingly and use it to our advantage.”
I asked him, “What do you mean?”
And this is where our conversation took a turn.
Reminiscences About the Financial Crisis and the Opportunities at the Time
My friend said to me, “You are a stocks guy, so let me give you an example that you could relate to.”
For the next few minutes, he talked about the financial crisis of 2008–2009 and how it all started (something I have extensively read about), and said, “I literally had nothing to do with the financial crisis. Heck, I didn’t even know that banks like Lehman Brothers would collapse. You have to understand, I am not a financial expert. I am an average man who’s trying to live life. I couldn’t change things around. ”
My entire life, I have heard one thing over and over again: ‘buy low, sell high.’ You went to business school; I am sure they taught you this too. During that crisis, stock markets were crashing. If you listened to the noise, it would have convinced you that the world was falling apart. I remember that sales of underground bunkers were surging because of all the pessimism around.
He then talked about how to find opportunities, saying,
I kept asking myself, ‘did everyone forget the holy grail of investing?’ Everything was selling for so low. Isn’t that the time when you are supposed to buy? I can’t tell you how many of my friends were panicking. They all had cash on hand and did nothing with it. They paid too much attention to the noise and missed out on a great opportunity.
How to Manage Risk and When to Possibly Buy
Onto the trade war topic again, my friend said, “Sure, we are hearing about the trade war and it’s worrisome, but it hasn’t done much, and I am really not losing sleep over it. Again, it’s all noise. Until it does something, I will see what I can do. As I said earlier, I don’t have control over a lot of things.”
At this point, I was intrigued to find out what he’s doing now, so I asked him: “Do you think markets could go higher then?”
About stocks, he wasn’t too optimistic, saying, “Right now, call me whatever you want; stocks don’t seem low. They are far from it. The sell-off in early 2018 was nothing. Things will be low when you hear about companies like Amazon.com, Inc. (NASDAQ:AMZN) losing 50% in value and the noise calling for it to go lower.”
How is he preparing himself if something like that actually happens?
“Lo and behold, if the market drops—it hasn’t really yet—you can expect me to become very active. I like things when they are down. Whatever it is, be it houses, stocks, or businesses.”
My last question to him was, “Are you nervous about losing money?” He replied, “Sure, I have lost money. It’s part of the game, but I manage my losses. Hope and optimism have their place, but, while investing, keep them aside.”