Bottom Line/Personal: Most investors probably think they have their hands full just looking at companies and trying to choose the best ones. But then you have everything else going on in the world, including wars, famine, politics, weather and all the other external factors. So how much attention do you need to pay to those in order to be a successful investor?
I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.
Today I’m speaking with Vahan Janjigian, PhD, CFA. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan previously served as editor of the Forbes Special Situation Survey newsletter, where he was ranked the number-one stock picker by Hulbert Interactive for the decade ending in December 2012.
Vahan, besides the actual stocks and companies, there’s a whole world out there where some great things are happening and some bad things are happening, and economies are up and down, and there are wars, and there’s weather. My question is, how much should investors pay attention to all of those external factors?
Vahan Janjigian, PhD, CFA: I would say not much. If you look at how the stock market has been performing during all these troubled times, you would conclude that they don’t have much of an impact on the prices of stocks. Clearly, when there is some kind of unexpected, catastrophic event that takes place somewhere in the world, you will see a sell-off in stocks. But it turns out that most of the time, that’s temporary.
If you look over to long term—through World War I, World War II, the Vietnam War, the terrorist strikes in New York City—stocks have continued to go higher and higher and higher. So if you’re a short-term trader, yes, that’s something you really need to pay attention to. But if you’re taking a long-term investment focus on your portfolio, to a large extent, I’d say you can ignore that stuff.
Bottom Line: I want to focus on one of those factors, which sounds external but maybe isn’t quite that external when you think about it, and that’s the economy, which seems to have a more direct effect on the fate of various companies and what they’re able to achieve.
Janjigian: It turns out that there is a correlation between the economy and the stock market, but again, only over the long term. We’ve recently gone through a period where the economy’s been doing fairly poorly, yet the stock market is near all-time highs. We had a financial crisis…GDP growth was very low…unemployment went really high—yet stocks continued to go higher and higher.
And it turns out the reason was because we had a Federal Reserve that stepped in, made sure there was a lot of liquidity, drove down interest rates. Corporations were able to get capital at low rates…corporations were able to cut their expenses. Even though they didn’t have much revenue growth, they were able to grow their earnings and stocks went higher and higher.
Over the long run, however, there is a strong correlation between the economy and stocks, so if we don’t see the economy starting to improve significantly soon, I would be less optimistic about how the stock market may perform in future years.
Bottom Line: What about investments that are often talked about when we assume that the economy may not be improving? Defensive investments, alternative investments.
Janjigian: Well, you should always consider alternative investments. For example, we had a financial crisis, and you would’ve thought that gold would have done really well. Yet gold is down significantly from its highs. We have things going on in Europe with Russia and Ukraine. We have the fighting in the Middle East. You would have thought that gold was a safe haven and gold prices would have gone up, but instead they’ve come down.
And that’s because investors have decided that US Treasury bonds are actually even safer than gold, and they’ve been using bonds as a safe haven. So we’re in this odd time where bond prices are going up and stock prices are going up as well.
Bottom Line: And finally, politics. It feels like we’re already in the next presidential election, and people will start to once again make lots of big decisions based on where they think that will go. So what’s your take on looking at politics as you decide on your investments?
Janjigian: The evidence seems to suggest that the stock market does best when we have a Democrat in the White House and Republicans controlling the House and the Senate. We have another presidential election coming up. If you’re an investor, you might want to hope for that kind of outcome. You might want to hope that the Republicans take control of both the House and Senate, but that a Democrat wins the White House.
But personally, I don’t pay too much attention to that. I’m really more focused on corporate revenues and earnings, and how that’s going to affect stock prices.
Bottom Line: So overall, as an investor, don’t worry too much about these things, because in the long run, there are other forces that are more important. If you’re a trader, then yes, of course, what’s going on out there will have a big impact from day to day.
Janjigian: That’s right. Keep in mind that, on average, stock prices go up. If you are betting that the stock market will go down over the long term, you will probably be wrong. And that’s why it’s always a good idea to take advantage of big market sell-offs and buy more stocks at those times.
Bottom Line: What do you check first in the morning, market news or world news?
Janjigian: Well, I check The Wall Street Journal. That’s one of my favorite publications, and of course, that covers both. And I do pay attention to both of those things. One of the first things I look at when I wake up in the morning is the futures, just to see how the market’s going to open. It doesn’t really affect my trading decisions because I’m more of a long-term investor, but it does tell me how investors are thinking that day.
Bottom Line: What’s the longest period of time you would be comfortable not knowing what was going on in the news out there?
Janjigian: I’m the kind of person that has to constantly check the news, because I don’t feel comfortable not knowing what’s going on. But there have been times when I’ve been out of the United States and in countries where English newspapers were not available, English television was not available. So I kind of felt like I was out of the loop for quite some time, and to tell you the truth, it was very relaxing.
Bottom Line: So check the news, but don’t let it rule you.
Janjigian: Absolutely.
Bottom Line: Thanks, Vahan.
Janjigian: Thank you.
