There are years when the market does not do much for our portfolio. What we do in those years has a strong bearing on how our portfolios perform after. Being decisive in our investment actions during difficult periods will deliver superior performance over the long term.
Investors know this very well. Yet, during such years, investors tend to spend a lot of time wondering if it is the right time to contribute more capital to their portfolios. As sentiment tends to be weak, self doubt and anxiety dominate the investor mindset. The inability to find new ideas at the right valuations bother investors. The anxiety to identify new ideas also leads to a dilution in the quality of investment ideation. Under such circumstances, the investor is in a hurry to spot newer opportunities, and tends to go down the quality ladder trying to spot good stock ideas. Often, the investor also shows willingness to pay more for such stocks just to buy them. Lowering the quality of stock ideas and paying more to buy such stocks can spell double trouble over the long term.
Investors need to consciously avoid overpaying for stocks and at the same time avoiding purchasing mediocre businesses. Lowering portfolio quality at a time like this will work counterproductively when the market valuations soften. You will own weaker companies when you can buy superior companies. This is something investors need to consciously avoid in the current phase. While it is important to avoid buying weaker companies, it is equally critical to identify superior businesses that you want to own when the market corrects. Doing the groundwork on companies, identifying the right businesses, creating a buying strategy for those companies and keeping the required liquidity ready should be the priority right now. The game is all about being ready to invest and waiting for the right valuation. The waiting game can be testing especially if you have investment compulsions and performance pressures.
An investor must avoid putting himself under pressure to perform in this environment. Instead, an investor must demand more from himself in terms of identifying opportunities and participating with scale. The pressure must move from performance to contribution. An investor must measure his contribution in terms of ideation, capital, and decision making. At this juncture, the market is only interested in measuring performance, when it has little to offer in that domain. An investor’s time is better spent elsewhere.
Investors who are swift to make the shift will benefit from the mindset change. Playing the waiting game is also playing the winner’s game.