THE market seems to be overly preoccupied with US President Donald Trump’s antics.
For instance, share-price volatility surges whenever he says anything bizarre, which is quite often.
This is understandable. French President Emmanuel Macron summed it up perfectly when he criticised Trump for treating the Middle East conflict as a show.
He added that when you want to be serious, you don’t say every day the opposite of what you said the day before.
But Trump seems to treat his presidency as just a game. And playing games, especially over on the other side of the world, serves his purposes perfectly.
It helps to deflect attention away from his home turf.
The cost of living for American households has gone from a problem to a crisis because of his import taxes.
Now, however, he has an excuse; he can always blame Iran for pushing up prices in America.
But enough about politics. What is curious is that even after nearly 15 months of dealing with Trump’s stunts, the market is still visibly shaken whenever he does anything flaky.
Perhaps it comes down to a popular stock-market misconception that we need to continually do something. Hence, the constant flip-flopping from risk on to risk off.
Doing nothing is best
There are many stock market fallacies, but fiddling with the portfolio is quite high up on the list.
The urge to tinker might go some way to explain why some investors believe they need to constantly stir the pot to get better returns.
But when investing, doing less can often be a route to getting more.
When we invest, we should try to know as much as we can about the companies that we put our money into.
For instance, we should want to know if they are generating cash. If so, how much cash are they producing? How does that cash flow relate to the prevailing share price? Is that cash flow consistent?
It can be a good way to determine if we are earning a decent annual cash return for every dollar that we invest in the business.
We are not alone by being meticulous. The late Charlie Munger once said: “Look for a horse with one chance in two of winning and which pays you three to one.”
Ignore the crowd
Those opportunities don’t come around that often. But here’s the thing. Trump has presented us with countless gifts because of his daft behaviour.
Whenever he does anything inane, the market often reacts in the only way it knows how – by selling.
So, if we have a list of prospective shares on hand, we can quickly capitalise on his lunacy. We should ignore the crowd. We need to focus on personal goals rather than popular opinion.
That doesn’t mean that shares can’t fall further. For instance, just when we thought that Trump couldn’t get any more outrageous than kidnapping the president of Venezuela, he manages to prove us wrong.
He goes and starts an unwinnable war in the Middle East that could plunge the world into an economic slowdown.
Forever is a long time
Whether we get the anticipated economic slowdown remains to be seen. According to the International Monetary Fund, the war in the Middle East has upended the global economy.
It has warned that disruptions to oil markets could slow economic growth, fuel inflation and even raise the possibility of a global recession.
It reckons that even if the war is short-lived, the damage has already been done.
The upshot is that the ability to generate cash under all conditions is crucial.
It is also vital to look for businesses that have balance sheets that are built like a fortress.
These companies should be able to withstand any or all economic conditions – even a recession.
Warren Buffett once said: “Time is the friend of the wonderful company, the enemy of the mediocre.”
Our objective as investors is to look for those outstanding businesses that we can invest in for the long term.
On the surface, they might appear mundane. But if a business can grow at, say, 10 per cent a year, we could double our money every seven years. There is nothing dreary about that.
That is the key to investing in companies for the long term. Look for shares that we are happy to hold, even if the stock market should shut down for 10 years.
But it takes commitment to buy shares that we are willing to own for the long term. If we don’t have the confidence to buy and hold a stock for at least a decade, then we shouldn’t be buying it at all.
Trump likes to be the centre of attention. But it would be a mistake to let what he says affect our focus. The centre of our attention should be cash flow.
And, if we are income investors, then the sound of dividends hitting our bank accounts should quickly drown out the drivel that comes out from the White House.
The headlines feel worse than the market itself.
So what are experienced investors actually doing right now? Our FREE report reveals how to position your portfolio amid volatility. Download it for free here.
Follow us on Facebook, Instagram and Telegram for the latest investing news and analyses!
