Why I continue to invest in stocks?

by Manshu on December 12, 2011

in Investments

As the investment climate turns more pessimistic by the day – more and more people are turning away from the stock market – and I’m being asked by friends why I continue to remain bullish when there is so much bad news coming in from all directions.

The answer to that is I’m not bullish in the sense that the market will go up next month or next year or in any other ways that people generally think about being bullish. Yes, I’ve bought stocks in the last few months, and will continue to do so in the coming months, but the reason for that is not because I’m bullish in the sense that most people think about it.

I have no idea where the market will be next month or next year or two years down the line, but I do believe that companies will continue to exist and make profits many many years down the line, and as long as I invest in companies that don’t go bankrupt and with money that I won’t need in a hurry I think I will come out fine.

I recently re-read some parts of The Intelligent Investor, which is of course considered the bible of value investing, and I think two excerpts from the book capture how I feel quite nicely.

Here is the first one:

A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

Except for the first one or two years of investing when I was still in college – I’ve viewed stocks as representatives of companies and that makes it a lot easier to go through all the volatility that exists in the market today, and has always existed.

I think this mindset improves the chances of investing success phenomenally but I have no illusions of never making any mistakes, and I’m pretty sure there will be some mistakes and that’s really not in my control. I can’t be error free but I can diversify in a way such that those errors are not very costly.

Jason Zweig has added commentary to the issue of The Intelligent Investor I currently have, and I think this excerpt captures the essence of what I want to say about errors quite nicely.

The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong. Many “investors” put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham’s call for a margin of safety, these people took the wrong side of Pascal’s wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong

In my opinion – I can be wrong about two things – first about investing in stocks itself – five years down the line I could find that companies aren’t making profits any longer or less than they were five years ago and the macro situation was so bad that stock prices are just a third of what they were a few years ago. And to get away from this risk one could invest in debt instruments, real estate, gold or just keep cash – basically not invest 100% in stocks.

The second risk is stock specific risk and to get away from that you can invest in multiple stocks and especially stocks that have been around for decades, have low debt, high dividends and good fundamentals. This will at least minimize the chances of bankruptcy and if you have ten stocks in different sectors or large cap diversified mutual funds then you are protected from stock specific risk quite easily.

I’m not a market trader and I don’t pretend to understand everything that’s happening in Europe or how it will play out in the future – but I do know what has worked for me in the past and I have high confidence that companies that have been around for decades will continue to exist in the future as well and make profits. At this point, this is enough to make me interested in stocks, and be bullish as they say.

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