Investing for your future should be easy, but it's often far from it.
Take the start to 2016 as a perfect example. Investors' hopes were high that a new year would see the six-year bull market charge to new heights. Instead we were greeted with the worst start to a new year in recorded history over the first two weeks, with all three major U.S. indices diving deep into negative territory throughout much of January and February.
This tumble in stocks was a test of investors' emotions and convictions, and I'd be willing to bet that some investors packed their bags, so to speak, and headed for the hills.
But as the data has consistently shown, investing for the long term is almost always your best bet to build substantial wealth and retire comfortably. Based on a study from J.P. Morgan Asset Management using data provided by Lipper, a long-term investor who tracked the S&P 500 index from Dec. 31, 1993 to Dec. 31, 2013 netted a return north of 480%. Mind you, this investor would have waded through two recessions in which the S&P 500 fell back by more than 50%. Meanwhile, missing even 10 of the top trading days in that period of roughly 5,000 trading days would have reduced the gain by 60%. Miss the best 30 days, and your gain was almost entirely eliminated.
The three most important words of investing
We know, empirically, that long-term investing works. But we also know that you can't just throw a dart at The Wall Street Journal and buy whatever it lands on. That's not a smart strategy. Instead, we should heed the words of Warren Buffett in his recent interview with CNBC and always ask the following three words when weighing our current holdings, stocks on our radar, or macroeconomic events in general:
"And then what?"
Investing is all about the "And then what?" Earnings reports give us a glimpse of how well a company has performed recently, but what Wall Street and investors want to know is whether a company's business model is sustainable, how it will remain competitive, and what its outlook is over the next one, three, five, or 10 years. Buying companies that you believe will be worth more in a decade, regardless of the day-to-day market fluctuations, is where real wealth is created.
Putting it to use
So how do you employ "And then what?" in your research scheme? Take a news event and extrapolate it beyond the current moment in time to see how it affects a company's outlook and your own investment thesis.
Let's take electric-vehicle high-flier Tesla Motors (NASDAQ:TSLA) as an example. In February, based on commentary from Tesla, we found out that the Gigafactory being built in Nevada, which will eventually support 50 GWh in annual battery production, is ahead of schedule. That's no small statement for Tesla, which was behind schedule in introducing its Model S and Model X to market. News that production would begin to ramp up in 2016 has pushed Tesla's stock substantially off its two-year low within the past three weeks.
"And then what?"
Looking beyond the news event itself, how will the Gigafactory affect the dynamics of the EV market beyond (and including) Tesla? How quickly will the Gigafactory pay off for Tesla's Model S and upcoming, cheaper, Model 3? The competition is catching up in terms of run range -- is that now a problem for Tesla? Can Tesla maintain its competitive advantage? Will Tesla's ventures into home storage batteries and other scalable batteries beyond autos be profitable? Are lithium-ion batteries really the future for EVs, or will another battery come to replace them in the not-so-distant future? Can Tesla's Gigafactory switch production with ease should that happen?
These are all questions that emphasize the "And then what?" It's about looking past the news event and deciphering what that event might mean for the bigger picture. True, not all events will be thesis-shattering. However, thinking about things with an inquisitive "And then what?" mind-set should have you looking at a bigger picture and keep you from making hasty investing decisions based on your emotions, which are often an investor's worst enemy.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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