Thursday, January 22, 2009

How I learned to stop worrying and ignore volatility... a nice little strategy note released by Michael Mauboussin. [link to the article]

The article talks about the times we live in and what strategy a long term investor can adopt. The note is timely and insightful to read. Mauboussin concludes the note with the following advice:

1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.

2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.

3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet

4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.

5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. I agree. [link1, link2]

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