Hope is not an Investment Strategy – May 2020

Wishing. Hoping. Planning. Dreaming. It feels good to daydream or wish for something to come true. We hope for a lot of things. Having hope gives us hope whatever it may be.

I love this phrase although it is not original. It has been used by plenty of writers. The well-known version is “Hope is not a strategy”. I added in the “investment” part.

Hope has nothing to do with stock prices bouncing all over the place. Hope is not a strategy the Fed uses to determine interest rates.

Hope is more mercurial. “Yes, I’m going to do it!! Or not. Or I will wait to see what the weather is”. Hope is not an action.

But we all say it and use it. ”I hope ……” fill in the sentence.

Hope in the investment world is like wishful thinking.

There is no doubt we are living through a moment in history. Ten years from now the pandemic and its economic consequences will be textbook. People will debate forever about the course of actions taken or not taken. But we are in the middle of it now.

What should you do?

In every market environment there is always opportunity for those who have an investment strategy.

My strategy has been using cash to buy stocks.

I am not some stock market genius. Until recently I avoided the stock market altogether.

But I did have the opportunity to work with many corporate investment committees, Treasurers, CIO’s, and CFO’s.

From my vantage point I could tell if a company was in disarray or well managed.

If a company is bureaucratic and communication between different departments is difficult that to me would be a red flag. Constant reshuffling of senior management is another red flag. Could senior management make decisions? Red flag.

The biggest red flag I ran into was the Treasurer of a company issuing bonds. Issuing bonds means the company is borrowing money.

Institutional investors were not interested in buying the bonds of this company. The Treasurer called me to say how much they needed this deal, and could I talk to portfolio management at which point I said rather rudely “STOP TALKING !!”

The Treasurer had no idea that he was giving me direct inside information. Telling me that they “needed the deal” told me that the company was in trouble and trying to borrow money quickly. Someone could use that information to directly influence the bond price.

That company was a mess.

Regardless of my knowledge about a company, working for an investment firm I was not allowed to buy the individual stocks or bonds of any institutional client (publicly traded company) without going through legal and compliance first for approval.

A well-run investment company cannot risk a conflict of interest between the client and the employees of the investment management firm.

Today I do not work for a registered broker or dealer. I let my licenses expire intentionally because I wanted to manage my money without the restrictions of a compliance department.

I started out buying the bonds of companies I liked, if the interest rates offered were compelling. I was not interested in the stock.

Now, with the market going up down, up down, up down every day, I have gone back to the companies I believe will survive, and bought the stock.

In some cases, I now own both the stocks and bonds of a single company.

I don’t buy very much of any one stock regardless of my long-term convictions. “Not much” is about 1-2% of my portfolio value. If the stock has a high price, I buy fewer shares.

No doubt there will be companies that do not survive and will declare bankruptcy. I’m prepared for that because I’m not hoping that some miracle will bail them out.

Managing risk in your own portfolio means never having to say you’re sorry. Scratch that – it’s a line from an old movie.

Managing risk means never investing more than you are willing to lose in any one security. That goes for individual stocks and bonds, mutual funds, and ETF’s. Managing risk is a strategy.

If you are ready to buy a few shares, don’t overthink it.

Manage your risk and buy what you can afford.

You are going to have winners and losers. Everyone who invests has winners and losers.

If you are ready to invest and find yourself saying:

• “I hope I make enough money to buy a car”
• “I hope I make enough money to pay off my student loans”
• “I hope I make enough money to ……..”

DO NOT INVEST !!  

What, me the person who is always telling people to invest  Yes. You are not ready. You won’t “get lucky”. 

Emotions often drive returns. Individuals do buy when stocks are expensive and sell when there is a sign of trouble.  That is when investment opportunities appear.

But hoping you will do well? Don’t use hope as your investment strategy.

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.