3 Simple Ways to Stay Sane in the Market
I don't blame investors who are fleeing the equity markets. With the daily ups and downs, it is downright maddening to be a participant. After you've done your research, consulted your advisor, and prayed to any array of deities, your prized investment pick takes a 10% hit in a day because of a tepid earnings release. So, all that considered, why would you want to be in the markets? The reason is simple: Investing in companies, in the long run, remains one of the best -- if not the best -- use of your non-essential capital. The key is to know how to view your investments, as well as the market at large. These easy-to-use tips will keep you from throwing your computer out the window the next time the market takes a dive.
1. Turn off your TV
I don't have cable. Not because I am trying to be trendy and going "unplugged," but because if I had access to all the news/infotainment channels, I'd watch them. And no matter the discipline I've cultivated over the years regarding the information pipeline, if I have the telly tuned to MadMoney long enough, I start to listen.
This is a major contributor to market hysteria. The 24-hour news cycle, for all of its benefits, is incredibly detrimental to the financial world. There's no need to have all-day programming regarding the markets -- and the networks know that. That's why they have to resort to sub-optimal programming that borderlines sensationalism so that advertisers remain interested.
Luckily for you, you are ultimately in control of this info-overload. No matter how appealing the headline may be regarding your favorite company, just don't watch. Change the channel, or better yet, turn it off.
Earlier in the summer, toward the end of spring, investors and analysts were fleeing from mattress companies like Select Comfort (NAS: SCSS) and Tempur-Pedic (NYS: TPX) because of so-so demand reports repeatedly covered on CNBC, Bloomberg, and the like. Stock prices absolutely dissolved over the course of a few months, with the above-mentioned companies' market caps cut in half or more. What happened just two months later? Stellar earnings reports and increased demand. Select Comfort went from its June dip of under $20 per share to nearly $30 today. Tempur-Pedic climbed back up from its $23 low to above $30. Those who had listened to their TVs were urged to sell "before it's too late."
Takeaway: Your television is great for watching eccentric personalities decompose on reality shows, not as guidance for your hard-earned savings.
2. Read often, read thoroughly, read selectively
It is often said that Warren Buffett reads hundreds upon hundreds of annual reports every year. Now, you don't need to read that many, unless you are managing millions or billions of other people's money, but pay attention to the fact that he reads annual reports.
Buffett goes right to the source -- the SEC documents -- and reads the progress of a company over a series of years. He supplements this with daily newspaper reading to keep on top of the news.
You have been trained to pay attention to quarterly progress reports for a company. When you do this, you are taking in short-term trends that often arise from external factors beyond the control of the company in question.
Hit the zoom-out button.
For example: I have a bullish CAPScall on Wynn Resorts (NAS: WYNN) . Since then, the company has dropped around 15%. The reason is softened demand and increased competition in the Macau gaming arena. Did 15% of Steve Wynn's masterfully created empire disappear over three months?
I don't think so.
Wynn himself is widely considered the best showrunner in all of the gaming industry. He's less volatile and political than Las Vegas Sands' Sheldon Adelson, and is very committed to a long-term plan. His method seems to have worked so far -- he runs six resorts in Vegas, three of them considered to be the cream of the crop. And he certainly wasn't the first guy in town. He was one of the first guys in Macau, where his company, on a longer time horizon than a single quarter, has made an absolute fortune.
I don't really care about the "softened demand" in the gaming industry or other players opening casinos in Macau. I have read Wynn's annual reports for years, and I have researched Wynn himself. I am confident it is a great company, and the most innovative in its space. As long as there are human beings, there will be those who want to play the stakes. I am happy to invest in the man who runs the best gaming shop around -- no matter what short-term trends and pundits say. Because over eight years, the company has returned over 14% annualized.
3. Be boring
If you invest in tomorrow's world-changing companies, you're going to be nervous today. Putting your money into a high-tech company isn't going to let you sleep better at night. You are far better off investing in easy-to-understand businesses with bulletproof revenue drivers.
Take a look at a company like Winmark (NYS: WINA) . Winmark franchises a variety of secondhand stores , unloading the risk to the franchisee while collecting royalties. The company also provides small and mid-sized business leasing services. It's one of the least sexy companies I can think of -- and also one of my favorites. The stock has risen nearly 20% over the last year, and in recent years has been paying a respectable, sometimes chunky, dividend. To top things off, it is run by a man who has been in this exact business his whole life and knows precisely how to run it.
I can put my money in Winmark, knowing what the future holds for it. In boom times, the company will do well from its leasing end, as more people will be opening and expanding their businesses. In rougher times, the secondhand stores will outperform the retail sector, handing over extra royalties to the parent corporation. It's a stock that lets me sleep well on my Select Comfort mattress.
By isolating yourself from incessant media, doing the right kind of homework, and sticking to basic businesses, you will find yourself less stressed out by the market's irrationality. More importantly, you will find your returns will be less volatile and more attractive than the vast majority of professionally managed funds.
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The article 3 Simple Ways to Stay Sane in the Market originally appeared on Fool.com.Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Tempur-Pedic International. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.