It is easy to forget why we do all this, and the importance of investing. After consuming so many headlines, articles, and podcasts, I myself have to step away from the screen sometimes to reset. The events taking place in the markets – and in a broader sense, our world – require a lot of focus. Beyond that, there are personal things we must take care of and without listing all those off, they’re necessary or carry some level of importance to us.

I’m sure most people would claim that they’re not materialistic or use money as a definition of happiness. But money can be viewed as a tool, a way for us to improve our quality of life. Money allows us to live comfortably and enjoy the luxuries life has to offer, things many people dream of and work very hard to achieve. The residue of our hard work should be preserved to the best of our ability so that we can obtain the quality of life we desire and share with those we love. It is in our interest to avoid making decisions that threaten this. That is why we do this.

Measuring Risk
As an investor, you put up money with the hopes of being compensated with more money down the road. Simply put, the compensation you hope to receive is measured in terms of the risk you accept today. The greater the anticipated return, the greater the degree of risk. This is a basic and binary way of approaching investing. In March of this year, I wrote an article sharing my thoughts on how to frame your mindset for navigating the markets. I think it is very applicable today – for better or for worse. To summarize, when placing capital in the market you should gravitate towards the highest quality companies you can find. These types of companies have a better chance of turning into compounders, they are hard to come across, and letting them go is usually a mistake.

The hardest part about turbulent markets is seeing green numbers turn into red, it does not feel good, especially for the sensitive investor. Emotions should never dictate investment decisions especially when they can have an adverse effect on your long-term plan. To prevent your emotions from getting to you, the risk you place in the market should be stomach-able. And more importantly, the volatility is easier to stomach when your hard work residue is placed in quality names with tolerable risk.

Sell! Sell. Sell? Goodbye! Goodbye? Buy? Buy. Buy!
Similarly, buying stocks on the way down is often glamorized. If you have heard the term Buy the Dip you know what I’m talking about. If you have not, it is the modern-day equivalent of Buy when others are fearful and sell when others are greedy. The point is: When others are selling, it is probably a decent time to be buying. But I think the deeper meaning gets lost in translation today. That being, when there is so much fear in the markets people will begin to sell their best positions in fear of watching their winnings evaporate. Others will follow and a spiral ensues. The wise investor takes advantage of others’ blunders.

Gambler’s Fallacy is the belief that if a particular event or outcome occurs more frequently than in the past, it is less likely to happen again (and vice versa). The most famous example of this took place at a Monte Carlo casino in Las Vegas, in 1913. The story goes that the roulette ball had fallen on black several times in a row leading the current players to think it would have to fall on red soon, and as you can guess bets started to accumulate on red on the next spins. The ball fell on red after 27 spins and millions had been lost by then.

The lesson here is that misjudging whether a series of events are truly random and independent, then wrongly concluding the next outcome will be the opposite of the events preceding it. A stock that goes down does not have to go up because it has declined some amount, and vice versa for when it goes up. The best thing you can do is take advantage of discounts on high-quality companies. Patience will win over time.

The End Game
Remember what I said earlier, we do this so that we can reach a higher quality of life. Your only goal is to maintain and increase your assets to keep up with your costs of living. Unnecessary and risky decisions that can upset that path is dangerous. Thinking long-term is the best way to navigate turbulent markets like we are experiencing today. No one could have expected Russia to go into conflict with Ukraine, further sending uncertainty into global markets. The good news is that markets will always be volatile, and the latest event will make headlines just like the previous. Having the discipline to frame your mind like a true investor is the best investment you can make in yourself. Investing is a means to an end and a great means at that.

– Kenneth Wolin

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All charts and data from Bloomberg unless otherwise indicated.

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