Rational Advisor

as often happens in times of market turmoil, and when advisors and investors are questioning a rational approach I turn to my rational friend David Dreman

Here’s some of the notes from todays call

In the Short Term markets are random, but in the long term they are very predictable. The thing is not to get caught up in the short term.

Our brain is an explanation machine, we like stories, and everyday we get too much info, and all you remember is the stories. As cavemen, these stories protected us ” dinosaurs came to that rock and my friend got killed, stay away from that rock”

These stories today make us irrational, and led us to making mistakes. our brain takes short cuts.

For todays version of the dinosaur story “my friend went to New York Central Park two years ago and was mugged, don’t go there” well, if I followed that I would not see the umpteen police that are there since 9/11 the extra level of security, it’s not that a mugging cannot happen, it’s just that it is much more rare. So, we have to be careful about the stories we are currently being told by the media.

Your emotions do not respond to reason, they react to what is infront of them. So, if you see your performance every month you will react to it, if you see it every minute you will react to it even more. This is why day traders are very seldom rich. GICs are five years in length, well, put your investments in the same pattern, and look at them every five years.

Avoid the news stories, remember bird Flu, SARS, and Mad Cow, people thought they would die from it, what they did not realize is that car crashes ar more serious and kill more.

Our emotions make us buy when prices are high and sell when they are low - our worst enemy for our investments is ourselves, this is why having an advisor who has no emotions, and won’t change the portfolio, just because your emotions wants you to change it is the most important advisor you can ever find.

Keep things simple,

when you are investing remember, you are buying a part of a business.

Buy good companies that are making profits, and pay out dividends. A dividend is a payment from profits, if they have rising dividends that measn they have rising cash flow, which means the company is growing.

Buy Bonds, this is an IOU from the governments, they pay interest consistently, Yes, sometimes they may not look attractive, but that’s fine, because they are still doing their job.

Remember habits are the hardest things to break, especially the bad habit of moving things around, just to show your worth. Sometimes doing nothing is more valuable

People do not like to hear the truth, they don’t want to hear how bad their investments are doing. But that’s the best time to talk to them, and to explain that the investments are doing well, it’s just that the market has decided to over value unsafer investments.

Ultimately Discipline and patience will win, when there is a rational approach to investing.

Past perfromance does not predict future results, but is does make you understand risk. So when investing, to understand the risk, look at what is the worst twelve months return, and then understand is that within your tolerance range.

Thanks

Rational

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