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Think Warren Buffett, not Steve Cohen

By Hans Parisis
Tuesday, 25 Mar 2008 03:45 PM Current | Bio | Archive

What happens when markets go into panic mode?

Well, a lot of things: Investors deal with emotional outbursts, there's a frenzy of talking heads on the financial cable TV shows — and lots of really bad advice.

At the same time, these dislocations create opportunities, if you manage to keep your wits about you.

The Wall Street Journal this week summed it up nicely:

Invest during a panic: When panic hits the front pages, put a toe in the water.

Don't speculate: Look for securities that offer modest, but predictable gains. Think Warren Buffett, the Sage of Omaha and a very long-term investor, not Steve Cohen. (He's the hedge fund manager behind SAC Capital Partners. Successful, but definitely playing a different game.)

Don't make too many bets: Feel free to sit most hands out. You should only place your bet when you really like the odds. You can be diversified without owning every asset class.

Be very wary of any boom: Remember, price matters. Avoid buying into the hockey stick part of a surge — that's way late in the cycle. If you are early into a sector, you should sell off 10 percent into each quarterly surge.

Don't put too much weight on expert financial analysis: Learn to become a self-sufficient investor. We have seen too many examples where most economists got the big picture way wrong, and where analysts were compromised by their own firms.

Do you really need to pick individual stocks? Most people stink at stock picking. Given the universe of ETFs, you have a lot of options without the individual stock risk.

Invest in stages: Ninety-nine percent of people cannot pick the bottom; even fewer get out right at the top. Use dollar cost monthly averaging with indexes, and invest over time.

Only invest for the long-term: That means five years or more. On rare occasions, it means 10 to 15 years. Daily moves are noise; focus on the signal.

Consider a really good active fund manager: They do exist, but they are rare.

Everything has risk — even cash: Try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.

Start moving away from the U.S. dollar: The long term trend for the dollar remains down. If you have global price rises and your currency is weaker by the day, then there is a strong case for moving away from that currency.

Here are some of my own caveats to the above advice: Your own retirement timeline is very important. If you are 10 years or less from retirement, you need to be more conservative.

Know thyself. If you cannot deal with being underwater, then you must adjust accordingly. Long term is seriously "long term." That may mean patiently waiting for a decade or so — think Japan in the 1990s, or the U.S. from 1966 until 1982.

Inflation is pernicious and ever-present, even when it's officially less than 2 percent. (That's the "official" consume price index (CPI), which is a misrepresentation of reality, of course. Real inflation is 7 percent!)

The time you have to manage your assets will determine how active you can be. Realistic dollar cost averaging will be required.

Try to keep it as simple as possible.

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HansParisis
What happens when markets go into panic mode? Well, a lot of things: Investors deal with emotional outbursts, there's a frenzy of talking heads on the financial cable TV shows — and lots of really bad advice. At the same time, these dislocations create opportunities, if you...
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