Talk about whiplash…
News over the weekend that Russian troops had occupied Crimea caused hair-trigger traders to hit the exits hard on Monday. Fearful a hot war would develop in Ukraine, equity markets swooned worldwide.
The next day, however, Putin announced he was “not going to fight the Ukranians” and the S&P 500 promptly hit a new all-time high.
No doubt Monday’s traders were left feeling a bit red-faced. And that’s fitting. Not because they should have known tensions were about to abate. That was anything but a foregone conclusion.
No, they should feel a tad embarrassed because trading breaking news is almost always a bad idea.
You’re Too Slow
Think about it. If you’re selling stocks based on the latest Internet headlines, you’re competing with high-speed traders who are able to bridge the 700-mile distance between Chicago and New York in four milliseconds. (Unsatisfied that this number is still not zero, this month they will begin deploying lasers that are even faster than microwave data transmission.)
In short, you might have better luck sitting down with Joe Cada, a World Series of Poker champion, for a few hands of Texas Hold ‘Em.
Aside from your disadvantage in technology, there is another reason not to trade global events. It doesn’t work.
We’ve Seen This Movie
Think back to 1990 when Saddam Hussein suddenly decided to turn Kuwait into southeastern Iraq. When President Bush demanded he get out, Hussein thumbed his nose. Everyone knew what that meant. War was coming. The Dow promptly plunged 20%.
But those prepared for Armageddon were disappointed (again). Operation Desert Storm sent Hussein’s army packing and the stock market began a 10-year ascent that became the biggest bull market of the 20th century. Those who panicked and ran to cash were left playing catch-up.
The same thing happened to those who forsook stocks after the Asian Contagion of 1997, the collapse of Long-Term Capital in 1998, the bursting of the Internet bubble in 2000, and the Great Recession of 2008.
In my former life as a money manager, I was always surprised that the same investors who panicked and ran to the sidelines one time were the very first to do it the next time… and the time after that.
Some people are slow learners. Others simply don’t have the perspective, the temperament or, frankly, the stomach to invest in equities. As the old saying goes, “If you don’t know who you are, the stock market is an expensive place to find out.”
Earlier this week, Warren Buffett spent three hours answering questions live on CNBC’s Squawk Box. (I don’t watch the show myself, but you can get a transcript on that rare occasion when something noteworthy is said.)
He counseled that investors should understand five key “shouldn’ts.” You shouldn’t go for instant profits. You shouldn’t feel like you need to be an expert to own stocks. You shouldn’t feel bad about temporary market declines. And you shouldn’t “invest” in Bitcoin, a pseudo-currency he predicts will be gone in a decade or so.
But his No. 1 “shouldn’t”? “Don’t let world events (like what’s happening in Ukraine) affect your investing decisions.”
There you have it. You can listen to the world’s most successful investor, a man who conservatively accumulated a net worth of more than $60 billion.
Or you can listen to the nervous, little reptile in the back of your brain that occasionally jumps to life and screams “Run!”
The choice is yours.