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KIM: Resolve to get comfortable with uncertainty in 2015

January 3, 2015

KimWith today’s 24/7 media bombardment, it’s easy to be overwhelmed by all the “expert” opinions. This is particularly true at the new year, as stock market prognosticators and soothsayers compete to be the next sound bite.

Similarly, you can bet the next time the stock market encounters turbulence, the talking heads will spew gasoline onto the fire. With so much data and information available instantaneously, it seems logical the world should be a predictable place. Unfortunately, this is a costly illusion.

However, if you can get comfortable with uncertainty; adopt a long-term perspective; and follow a disciplined, patient and unemotional investment approach, you’ll be miles ahead of most investors. Keep these thoughts in mind as we sail into 2015:

• While all past corrections (more than 10-percent decline) and bear markets (more than 20-percent decline) have proven to be buying opportunities, investors still fear future plunges. Warren Buffett pointed out the illogic of this dichotomy. Buffett loves hamburgers and will be buying them the rest of his life. Thus, he said, when their price goes down, his household sings the “Hallelujah Chorus.” When their price goes up, his household weeps. He noted most people have the same view for stuff they will be buying the rest of their lives, except stocks. Witness the anxiety caused by the 7.5-percent drop from mid-September to mid-October, which was quickly followed by the usual hysteria surrounding Black Friday/Cyber Monday sales. Unless they’re done buying stocks for the rest of their lives, long-term investors should view bear markets and corrections as the market’s periodically putting stocks “on sale.”

• Corrections, bear markets and recessions are part of the investment landscape. According to Crandall Pierce & Co., from 1900 to 2013, the market was affected by a correction, bear market and/or recession 45.5 percent of the time. That’s almost half, so when you hear those words in 2015, don’t panic.

• It’s a huge advantage if you can maintain focus on the next 10 years while others are obsessing over the next 12 months. Ben Graham, Buffett’s teacher and the “Father of Value Investing,” said, “In the short term, the market is a voting machine, but in the long term it is a weighing machine.” This means, over short periods, stock prices are set by investor sentiment and emotions (i.e. fear and greed). However, over the long term, prices reflect companies’ ability to grow earnings and generate value for shareholders.

This concept was illustrated in a recent study published by Selected Funds examining stock returns for holding periods of various lengths from 1928-2013. For one-month periods, 62 percent were positive and 38 percent negative. Lengthening the holding period increased the proportion of positive returns to 75 percent for one-year periods, 88 percent for five-year periods, and 94 percent for 10-year periods.

If we understand nobody knows what’s going to happen next, we can put the noise in context and actually benefit from randomness. At the very least, instead of having a panic attack whenever something unexpected occurs, we’ll adapt, adjust our plan (if necessary), and move forward. As Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Indiana. He can be reached at (812) 376-9444 or mickey@kirrmar.com.
 

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