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Be Dynamic, Investors! Stay Optimistic, but Don't Get Overconfident

Be Dynamic, Investors! Stay Optimistic, but Don't Get Overconfident
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Friday, 31 August 2018 11:01 AM Current | Bio | Archive

“This is very… undynamic. It needs to be more… responsive to input changes.”

I’ll never forget the first real criticism I got about my work in the finance industry. As a lowly intern – although I earned the nickname “Management Trainee” – at least I was spending my summer working at a place where they needed more important tasks done than fetching dry cleaning and laundry.

My first attempt at creating a spreadsheet to manage the company’s book of business received the above criticism. At the time, it stung. I thought I had done my best work. No, I knew I had done by best work.

But it was also my first real work in the industry. By the end of the summer, I’d be doing far better. Time and a willingness to dive into new opportunities can lead to a lot of growth in a short timeframe.

And not just with creating spreadsheets in Excel. I get it now. Life needs to be responsive to changes, from the lowliest spreadsheet to big changes in career, lifestyle, relationships, and on and on.

Those who fail to adapt will end up being left in the dust. The company that invented the digital camera, Kodak, was so preoccupied with its core business of selling film that others were able to come in. Now, cameras are ubiquitous, and far more photos are created, albeit digitally. Rather than have a chunk of that business, Kodak went into bankruptcy a few years back, and struggles on as a shadow of its former self today.

That’s not all. IBM was the leader of the computer space for decades. Its focus on large mainframes for processing huge amounts of data overlooked an entire other opportunity with home computing markets. Dozens of companies benefitted from meeting that market, the most famous being that of Microsoft (MSFT).

It’s not just a way of finding worthy investments (or finding undynamic companies to sell or sell short). It permeates all of life. The only true constant is change, and being prepared for changes—for better or worse—give us better survivability.

Being dynamic has a corollary to it that matters in life as well. That’s the idea that we all have blind spots in our thinking. It’s hard to react to changes that we have a difficult time conceiving of when they finally do happen. That’s why so many folks were blindsided by the housing crash a decade ago.

The company I interned with and had my first “real” job in finance was a mezzanine lender. They made second mortgages on high-value properties in the then-flying market of Southern California. One of my last jobs was to create a spreadsheet designed to figure out a “worst case scenario” for the firm.

At one point, I created some inputs that would show how much the portfolio of second mortgages would fare if home prices declined just 10 percent. The same boss who told me my first spreadsheet wasn’t dynamic enough told me I was being too pessimistic. Home prices fell far more than 10 percent, and any home with a second mortgage likely got foreclosed on by a bank. The company I interned for didn’t think a risk that dynamic would occur.

What should investors be prepared for today? Anything and everything. Stocks can and often will sell off suddenly, like they did in February. These 10 percent pullbacks are normal parts of a longer bull market trend.

It’s worth looking for bargains in the market when those kinds of selloffs happen. Investors waiting for the next 10 percent pullback, however, may miss out on 15-20 percent gains first. That goes to show that being in the market is still more important than trying to time the market. Individual stocks can be timed, but having a balance between a passive investment program (like a company 401k) and actively trading will help even things out.

But stocks can still head higher from here. Despite last week’s brouhaha over this bull market being the longest in history, it’s also the one that started from the lows of the Great Recession, with hugely depressed valuations, government stimulus, and record low interest rates to get things going.

If I had to make an educated guess, I’d say this market is near 1996 or 1997 levels. There’s some irrational exuberance, but it’s not quite in the kind of late-market bubble territory we tend to get before a rally dies.

So be optimistic, but don’t get overconfident. The economic data looks good right now, but that can change in time. Just stay dynamic in the markets, as well as in life, and you’ll fare well.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
 

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AndrewPacker
If I had to make an educated guess, I’d say this market is near 1996 or 1997 levels. There’s some irrational exuberance, but it’s not quite in the kind of late-market bubble territory we tend to get before a rally dies.
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2018-01-31
Friday, 31 August 2018 11:01 AM
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