Investing in the Current Market: Resilience Required

Few failures in the past several decades have taught investors such humility as the ongoing contraction in the global economy. It seemed that those who got burned in the Tech fallout and corruption scandals of the years 2000 - 2002 would have learned to approach the risks of investment more cautiously, and I am sure that there were many who were genuinely inclined to do so. But as the market heated up again, while businesses and consumers flourished on remarkably cheap credit, the allures of speculative investment once again became too strong, and we decided, once again, that we'd rather risk losing our money en total than get left in the dust of another exciting, speculative binge.

The desire for extraordinary returns is a characteristic of the market itself, and I might recommend that it is also an essential fraction of any strong investor's competitive DNA. Resilience, however, is a quality few of us, at the moment, are willing or able to combine with the ambition to succeed. Yet, an investor who is strong on resilience in the current market will likely begin realizing the gains, over time, that make the rest of us wonder how it's done.

Resilience is a willingness to weather the difficulties of market risk. It is an expectation that a protracted slump in a stock's price, or in the economy, does not spell disaster, or a reason to sell, necessarily. Resilience reflects a fairly comprehensive approach toward decision-making, and an ability to resist guesswork during strenuous times, and a consummate ability to defend one's self esteem as well.

The decision to sell a security that has performed poorly is very difficult to make, as the point of long investing is not to buy high and sell low, but the opposite, of course. Selling when a stock has gone down represents a realized loss, and the guilt you will feel at making that poor decision runs an additional risk of compounding should that stock stage a comeback. Some investors simply adhere to a numerical standard regarding performance against the market to rationalize these decisions, and move on to better choices, while others adopt a more intuitive approach. Successful managers can be found in both camps.

Investment choices represent the assumption of risk, and the important lesson many of us should derive from our own generational economic slump, is that it may be important to plan ahead in the event that the optimism with which we must make all investment decisions proves wrong. Why am I so confident in this security? How will I feel if the stock slumps? Why do I consider this stock to be undervalued by the market at this time? When will I sell, regardless? In a recession, these are the kinds of hard lessons that we will learn, and perhaps this column itself represents the kind of generic advice that gets passed around also at these times, however, I've still seen very few in the investment media really calling for a capitulation of the recklessness that has shaken our markets so thoroughly.

While I had hoped that our collective days of demanding exceptional returns were over, there is now some good proof that the fickle "bull-chargers" of yesteryear are still around, pushing the stocks many of us would like to invest in far above what they seem to be worth. Even now, in what promises to be a challenging financial crunch for our economy, we can see many of the favorites of hedge funds and other aggressive managers zooming yet again toward the stratosphere. Is this really happening? Again?

In truth, however, we face the same challenges that have conspired to upset so many other investors over the past decade who were weak on resilience: the good companies have been taken, bought up, and bid too high, while all the others do not seem to promise acceptable returns. Both of these statements, of course, represent the gross generalizations that a successful investor must unravel. Realizing that some of the "hot stocks" may yet be undervalued could sound ludicrous at this time in which wonder just what happened over the last 2 years, yet it is my opinion that some of the quality tech names that have seen a robust recovery over the last 6 months will sustainably improve upon their historical highs as time goes on. Of course, getting there in the short term will require nerves of steel, but this is the case with any stock that has a high beta, or risk, rating. In these cases it is important to consider the strength of the company in terms of management, direction and vision. The fact that the market is once again pounding its dollars into the stock is a signal that the company is in good standing among at least some scrupulous investors.

It is my experience that another important factor when dealing with high risk stocks as an investor, is to consider your own appraisal of the company in terms of their standing with consumers, and what role they seem to play in the broader spectrum of commerce and culture. Do most consumers regard them favorably? What kind of impression do they seem to make on new customers? What kind of statement do they make about the market they are in? Questions like these are very hard to answer in markets that are unfamiliar or with companies that may not keep a high profile, yet they can offer valuable clues as to the direction of their fortunes and price per share. When a company profile along these lines has been established, it may be important to think about whether this is your "style" of company. It is better, on tough decisions like these, to be invested in companies whose culture and marketing strategies compliment your own way of doing business as well. It can help to stabilize your resolve as a market participant even if times get tough, and it is your resolve to stay invested and believe in your choices that gives resilience.

Other questions to consider are whether or not the company has been tested in the past and how they respond to challenges. Investor unrest or a declining stock price poses one of the more excruciating dilemmas for a company, and is important to note. Did they show resilience? Do they handle crises responsibly? Have they been challenged in their target market? Conventional analysis can take one only so far when appraising a risky, highly variable, stock, and it is for this reason that a willingness to ask other questions, of an intrinsic nature, can lead to successful strategies for managing your funds.