The principled investor buys stocks based on policy-driven portfolio management, not inspiration. With cold-hearted accuracy, these investors know that as soon as they make their purchase, their investment is as likely to go down as up. They don't care. They are thinking about a five, 10-, 20-, even 30-year time horizon.
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The inspired investor, however, looks for a touch of magic in their purchase. It may be the investment's price-to-earnings (P/E) ratio, technical characteristics, or even an insightful analysis from a trusted expert that makes a certain investment irresistible. There are countless reasons the inspired investor falls in love, but in every case, the same expectation is shared: This new object of affection will break free of the market's gravitational pull and float skyward towards unfettered wealth.
When such an investor finds his special equity, he can't help but feel infatuated with his new purchase. In this early phase of the investment cycle, the investor is dancing with Cinderella under the stars in all her glory. But even for Cinderella, midnight must eventually come.
When that inevitable moment strikes and sends his darling plummeting, the inspired investor is gripped with horror as he watches his Cinderella-like vision of beauty and grace turn into a soot-covered house cleaner tumbling down the boulevard towards what appears to be an ignominious demise.
Infatuated investors are also those that suffer the greatest whipsaw effect. As the fret mongers and deep-dive analyzers abounded this week decrying the demise of American ingenuity and business, their dour chorus crushed many an investor's inspiration, turning it to disillusionment. As quickly as these inspired souls rushed in, they now in turn rush out with similar enthusiasm.
This whipsaw effect was sadly illustrated once again in this week's market crash. And strangely, this crash was accompanied by the pundit's singular focus on the bad news, leaving the story about corporate earnings mostly unnoticed.
Although it is early in the second quarter earning season, with just 143 of the S&P 500 firms reporting, the reports are promising. 75 percent of firms have reported earning above expectations, 13 percent have met expectations, and a mere 13 percent have missed targets. Historically, only 62 percent beat expectations.
Furthermore, the details are quite encouraging. Average earnings for those reporting are 9.2 percent over last year—good but not shockingly good. Take into consideration, however, that Bank of America had to settle a lawsuit that represents a one-time, non-recurring expense. Remove that singular expense from the calculations, and earnings skyrocket to a very encouraging 15.2 percent over last year.
More firms must still report and surely it will not all be good news. But apart from the dour media makers, reality tells us that U.S. companies are essentially earning 15 percent more while the markets just decided that they are worth 15 percent less.
What should the average investor do? Buy low and sell high. It is a simple principle to understand, but much more difficult to follow, especially in times like these. We can all look back at '08 and recall the many testimonies of those that ran for the door when the Dow Jones Industrial Average was at 7,000, just to stand on the sidelines, paralyzed, as the markets moved back up to 12,000.
Don't be that investor. It is easy to get out, but very difficult to know when to get back in. If you miss a few critical days of market movement, you miss most of your portfolio growth. As others run for the door in fear, follow Warren Buffett's famous adage and be bold to buy. For the flint-jawed long-term investors, now may be the perfect time to trim winners and buy losers.
As an investor, do you know that your investments are worth holding onto? If in fact you own a globally diversified portfolio of low-cost index funds or ETFs, you can rest assured that today's pumpkin will in fact transform into tomorrow's carriage, yet once again.
Steve Beck is cofounder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.