Block Out the Noise When Investing
Gerry Cameron - Mar 18, 2019
With so much noise out there, and everyone giving their market and company opinions, discipline is needed to focus on what we can control.
A good friend of mine and I were talking about investing and the markets – how emotions can get in the way of making sound investment decisions. And we agreed that when your hard-earned savings are involved, it’s hard to not overreact. And that’s when my friend mentioned a book called, ”The Mental ABC’s of Pitching” by H.A. Dorfman, a sports psychologist. This book focuses on discipline.
According to the book Outliers by Malcolm Gladwell, it takes roughly 10,000 hours to master any craft. So, you would expect top-level pitchers to be masters after countless hours of doing repetitive drills and years of playing baseball, with most starting in Little League and moving up to Triple A Ball. However, many pitchers still find themselves standing on the mound with a thousand things going through their mind, messing up their concentration and ruining their game. Dorfman steps in to give them the mental discipline to build a structure of behaviour and attitude to plow through. He urges pitchers to adopt their own pre-game rituals to help calm their expectations, nerves, and ego – ultimately focusing on the things they can control. After one game, Dorfman approached Greg Maddux, a Cy Young Award winner in four consecutive years and record holder of eighteen Golden Gloves, to ask his thoughts. Maddux didn’t even mention the score of the game. All that mattered was that he threw 73 pitches and executed 50. Maddux focused on what he could control.
I couldn’t agree more with regard to this strategy. With so much noise out there, and everyone giving their market and company opinions, discipline is needed to focus on what we can control. Focus on the stocks you want to hold in your portfolio – stocks that meet your selection criteria in these challenging markets. The following are a few criteria to consider.
Credit issues can be a major concern to several companies, especially when the economy turns against them. For that reason, a number of investors look at companies that have plenty of cash and no debt, and they will determine a company’s financial strength with some ratios. One, for example, is the “current ratio” which compares current assets such as cash and inventory to current debts such as payroll and other liabilities. A ratio of 1.2 is considered a good ratio. The “quick ratio”, also known as the “acid-test ratio”, is like the current ratio without inventories when comparing assets to liabilities. Obviously, this ratio is more conservative, asking the question, “What if the company is not able to sell its inventory in the current year?”
Investors also look at the “market capitalization” (market cap), which is the amount of money you would need to buy all of the company’s stock. It’s a term used to determine the company’s size. Some people are willing to take on more risk with a small cap stock, hoping for higher returns. Others prefer large cap stocks which are considered more conservative. Again, determine the size of company you want to hold in your investments.
Finally, dividends are also mentioned as a criterion. Dividends give you a steady income from your investment, and when the stock price is down, receiving cash distributions gives you reasons to hold your stock position. But again, make sure the company is in a strong financial position to pay its dividends by looking at the payout ratio – the proportion of earnings paid out as dividends to shareholders. Also, see if the company has raised their dividends over the last few years. Raising dividends is usually a good sign.
When the pitcher is standing on the mound, and the crowd is yelling, he must focus on execution. When you’re bombarded with news and opinions on today’s markets, you have to stay focused on sound investment practices.