Back at the start of the Civil War, Southern legend says that a man named Cooter Brown lived at the dividing line between the North and South. In addition to an unclear home, Cooter had friends and family that were declaring their allegiances to both the Union and Confederate causes. Because of the mixed loyalties around him, Cooter was unsure whether to side with the Yankees or Southerners. As the war started, Cooter devised a shifty plan to remain in a state of permanent intoxication—he drank himself into alcoholic oblivion every night so that he would be useless to either the Union or Confederate causes. Throughout the war efforts, Cooter’s assistance was sought by no side, as the drafters found him to be more trouble than he could possibly be worth.
Although the story of Cooter Brown is one of caricature, the moral lesson is that an extended period of decisiveness eventually becomes its own decision. In the field of investing, the temptation to engage in Cooter Brown decisionmaking arises anytime we engage in:
(1) Paralysis By Analysis (We try to study things so much that we can never commit to a decision, out of the fear that there is always more information out there).
(2) Lack of Necessary Commitment (We buy a stock, and sell on unnecessary bad news).
The paralysis by analysis problem is usually something that shows up when you are first getting started invested. It’s when you have $2,500 and don’t know what to do—buy a Fidelity mutual fund? Buy a T Rowe Price mutual fund? Buy 1.5 ounces of gold? Buy Procter & Gamble stock? Buy Coca-Cola stock? Buy U.S. Treasury bonds? Buy an index fund that mirrors the S&P 500? Wilshire indices? Russell indices? What about real estate?
For the most part, the answer to that problem is just make a damn decision and don’t worry about it. Unless you are a beginning investor because you won the lottery, a large legal settlement, sold a business, or received an inheritance, then the amount in question is likely small compared to how much you will be investing next year, the year after that, and so on.
If you stuck getting started, you should ask yourself: Which potential investment do I understand the most? Which seems the highest quality? If I had to guess which one will grow the most relative to the price I have to pay today, which would I choose? Take the first two questions the most seriously, and if you still don’t have a clear answer, make an educated guess on question number three—and voila—you’re started.
Now let’s talk about the second Cooterism: the inability to stay committed to a particular investment.
The major impediment to making the necessary commitment is this: newspaper/blog headlines about a stock, and earnings season.
Here’s how I resolve the first problem. At the time I make an investment, I make sure it is high quality and I have a good chance of holding the company for 10+ years. And as long as we are not talking about a bank or technology firm (those types of companies do require constant diligence), I won’t say based on headline news unless I actually see a couple years of declining profits.
It is a common tendency for headlines to attack a company—McDonalds, Johnson & Johnson, and Microsoft immediately come to mind—but the companies actually increase profits throughout the duration of the criticism. Responding to headline warnings of risk that do not show up in a company’s balance sheet is a great way to be a terrible long-term investor.
And then there’s earnings season. One of the dumbest reasons you can sell a long-term holding is because the stock fell because it did not meet Wall Street’s earnings estimates. This irrationality is particularly egregious when a company is increasing profits, but the stock price temporarily falls because the profits did not rise as much as Wall Street anticipated.
Visa stock recently fell because it did not meet Wall Street’s expectations, even though it looks like the term company still has a perfectly reasonable chance of growing by over 10% annually over the next five to ten years. It’s crazy—if a company is increasing profits and you get scared and sell because of Wall Street’s missed expectations, by what right can you even claim to be a successful long-term investor?
There have only been two times since 1926 when long-term investing was truly hard. The Great Depression/WWII era and the 1973-1974 bear market were tough times to invest because corporate profits actually fell by over 25% and you had to make a judgment call about whether profits will rebound.
During every other recession in modern American history, the profits at major non-financial firms held steady or barely budged, even during the worst of the financial crisis. For instance, throughout 2008 and 2009, Wal-Mart and IBM were actually growing profits. Coca-Cola, Colgate-Palmolive, McDonalds, and Johnson & Johnson were holding profits steady during the worst of the recession. Why would you freak out and sell if a company is still gushing out nearly the same amount of profits during a terrible economic crisis? Let the Cooter Browns of the world be the ones selling Coca-Cola at $19 per share—I want you to be the one buying the stock from him.