DATELINE: January 20, 2016
It's been quite a ride in the decade since the wacky and memorable year that was 2006.
Looking back, we remember how 2006 was a tumultuous year for General Motors (NYSE:GM). Once a pillar of American business, it neared total collapse under the weight of a bloated cost structure and a protracted price war from Japanese car manufacturers after its employee-pricing tactic backfired.
But the company held on until midway through 2008, when the board coaxed Lee Iacocca and Snoop Dogg away from Chrysler. Iacocca brokered another guaranteed loan from the government to turn the business around, while Snoop took over the advertising group. We take it for granted now, but who back then imagined those two had the goods?
And remember when Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne sounded the battle cry against the Sith Lord and the forces of darkness, only to change analogies midstream and go on an Indiana Jones crusade to destroy the source of the evil? While many questioned his infatuation with George Lucas characters, we all owe Byrne for inspiring action to correct the problems associated with external clearing mechanisms in our financial markets. Overstock.com shareholders wish he had served as staunch a crusader for the company, but he had a lot on his plate.
And last but not least, who knew that value investing's popularity would crumble under the feet of the START (Short-Term Accelerated Return Tactics) funds? Nowadays, that wouldn't come as a surprise, because the behavioral finance community updates the market anomaly database on a quarterly basis.
But it was startling back then, because unlike today, news wasn't spread instantaneously -- it took hours and sometimes even days to interpret news. Blogs were only in their formative stages, so we didn't have instant access to the financial meanderings and opinions of every human on the planet.
Today, investor time horizons are still shrinking, due in no small part to the evolution of the merger between the New York Stock Exchange and Archipelago (AMEX:AX) back in 2006. As the stock markets converged to a single, fully electronic platform, transaction costs plummeted. The lower friction, combined with the ever-increasing number of stocks and securities, naturally led to massive trading volume, culminating in today's high-volume 24-hour-a-day stock market.
Too much information, driving me insane
It's funny to think about it, but back in 2006, many retailers like Gap (NYSE:GPS) provided only absolute sales and same-store-sales updates on a monthly basis. But that year, continuous improvements in supply-chain-management technologies and the pressure to supply START funds with information forced companies to put out monthly financial reports, and the monthly earnings estimates that are not required.
Yes, 2006 was the starting point for a new era of market volatility that puts us in 24-hour-a-day fear of whiplash by the market, a trend that was first capitalized on by Goldman Sachs (NYSE:GS) with its risk mitigation products and strategies. Many Wall Street firms owe their huge success today to this volatility. After all, when you define risk as volatility in stock prices rather than the permanent loss of capital, it makes it much easier to sell risk-reduction products and solutions to customers as "insurance" policies.
Your most important asset
These days, we have constant access to prices, droves of data and information at our fingertips, and lots of analysis available whenever we could possibly want it. Too bad humans, despite the accumulated knowledge of judgment heuristics, still can't handle it well.
And that's why we look back on 2006 as a simpler time. Ironically, all our new capabilities and information sources have made successful investing far more difficult. How can we return to that easier time? What is the antidote? It is something that helped you just as much in 2006 as today: temperament.
In a hyperactive marketplace, you need the patience (and the chutzpah) to tune out the noise, find opportunities where prices are less than your estimate values, and make decisions when the odds are in your favor. And while that is very difficult for many investors and their incentive-caused biases for short-term performance, you have to make it work for you. Otherwise, you know the price of everything and the value of nothing.
How can you use temperament to gain an advantage?
- Do your best to ignore prices when analyzing an investment opportunity. Prices anchor your thinking and can cause you to make mistakes.
- Don't be envious of other people's returns. You don't want to fall into the trap of rushing to make decisions in order to "catch up."
- Resist the urge to act all the time. Make decisions with a cool head and after letting the information sink in for a while.
With so much analysis available, information advantages have been marginalized. So there's no better reason to start working on your psychological advantage. It's only going to get harder to resist your innate bias for action when bombarded with more and more information. Temperament today is more valuable than ever.
Warren Buffett is the epitome of temperament. I mean, how many other investors do you know who have held positions as long as he has and achieved his success? Could you hold a stock for 28 years like he has with Coca-Cola (NYSE:KO)?
Fortunately, Philip Durell is a patient investor too, tuning out the noise and giving you the best bargain he finds every month. Remember when he recommended Pfizer (NYSE:PFE) in 2005, only to see it go nowhere for a few years? Could you have waited that long for the drug pipeline to deliver?
So forget about prices, worry about your own terms, act sparingly, and learn how Philip is still using his temperament to beat the market in the Motley Fool's Inside Value newsletter. You can try the service, now enjoying its 12th straight of market-beating returns, risk-free for 30 days. Make 2016 your best investing year yet.
David Meier does not own shares in any companies mentioned. The Motley Fool has a disclosure policy.
Overstock.com and Archipelago are Motley Fool Rule Breakers recommendations.Gap is a Motley Fool Stock Advisor and an Inside Value recommendation.Pfizer and Coca-Cola are Inside Value recommendations.
