After roaring to their biggest gain since the 1990s last year, U.S. stocks are hitting new records in the New Year.
As my colleague Doug Davenport has pointed out, all signs are pointing toward bullishness among investors. And Jeff Altman and John Paulson, two of the best-known hedge fund managers, are forecasting an extension to the rally.
But that’s why it’s more important than ever to be selective. As I’ve said previously, successful investors invest with a purpose, keep their positions focused, and avoid trades that don’t offer an attractive risk-versus-potential-reward scenario.
You shouldn’t feel any pressure to invest based on every hot stock tip or market rumor. Instead, you should tune out the noise and make decisions based on the best information you can find. And then, act only when you see that the odds and potential payoff are in your favor.
|Tune out the noise and make decisions based on the best information you can find.|
In fact, in today’s stock market, you would do well to heed Martin Weiss’ warning against complacency and invest your portfolio in the same way that baseball great Ted Williams approached hitting a baseball.
Williams was one of the greatest hitters in baseball history. He combined power (521 lifetime home runs) with patience (more walks than any other player of his era) and control (a 0.344 lifetime batting average).
He documented his legacy in a thesis on batting called The Science of Hitting.
Williams wrote that he would only swing at pitches when he knew he could usually connect and get a hit a high percentage of the time — places he called his success zones. If a pitch was on the fringe, he would patiently wait for the next one.
The lesson here is that you greatly increase the odds of success with your investing strategy when you are selective and only swing when the odds are squarely on your side! That’s because, as Warren Buffett reminds us, “The great thing about investing is that there are no called strikes.”
You can stand at the plate and let the pitcher (Wall Street, in this instance) throw pitch after pitch right down the middle, and you don’t have to swing!
If, for example, the pitch Wall Street is throwing is Apple at $540 per share and you don’t like the price or know enough to decide whether to make the trade — or if you know the odds aren’t squarely in your favor — you can let it go by.
There is no umpire to call a strike. In investing, taking a swing is entirely at your discretion. If only it had been so easy for Ted Williams.
For you, there is only one way to strike out, and that’s if you swing and miss. So there is no reason to swing unless you see the pitch you want.
That’s why — in an environment where it’s a well-known fact that the world’s central banks are artificially stimulating the stock market — you should choose only relatively safe stocks and keep some cash buying power in your portfolio.
That way, if the stock market continues to climb the wall of worry, your nest egg will grow. On the other hand, if we do have a downturn, you can deploy your cash opportunistically by adding to the carefully selected positions in your portfolio.