Create a Positive Long-Term Stock Market Mindset

Get your best investing results by adopting the right mindset and investing strategies that will lead you to profitable long-term investments.

When reading the investment and stock market news each day, it pays to take note of your mindset. This is a kind of mental filter that can colour your view of what’s going on in the world. It can determine what news you pay attention to, how much of it you retain in long-term memory, and what you dwell on when making investment decisions.

The wrong mindset can lead to a negative, if not catastrophic, view of the market. It’s almost as if you are brainstorming about what can go wrong in the economy, while downplaying what can go right. This leads to a focus on negative but low-likelihood outcomes for the long-term stock market. That’s especially so in the U.S., where Republicans and Democrats both feel the other party is out to destroy the country.

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Similar differences of political opinion exist in Canada, but in typically less extreme Canadian fashion.

On both sides of the border, people worry about the possibility of rising interest rates, in the event that the North American economy extends its long string of gains. But at the same time, they shudder at every negative economic statistic that comes along, since they fear this could set off a market downturn. They need to review some basic economic facts.

One is that a healthy economy grows in a two-steps-forward, one-step-back fashion. Wrinkles and minor setbacks in economic growth can grow out of a wide variety of rare occurrences.

Another is that inflation risk goes down when government policies encourage capital investment. The 2017 U.S. tax reform put limits on corporate interest deductions, and this might seem to discourage capital investment. However, the reform also liberalized write-offs of capital investment. I suspect faster write-offs will more than offset the interest-deduction limit, while also taking upward pressure off interest rates.

Many people seem to worry that high levels of government debt and deficit spending have passed a critical point, and a debt or inflationary crisis of some sort is inevitable. However, the U.S. grew out of a worse debt situation after World War II.

My view is that you need to balance a negative-focused mindset with what you might call an abundance mindset. Day to day news coverage zeroes in on weak spots in the economy, and on crime, terrorism and so on. However, this mainly reflects more intense and extensive media coverage, plus improvements in communications technology. The long-term statistics on all these issues are much more promising.

Meanwhile, a widespread negative-focused mindset suits me just fine. It leads some investors to disregard many of the best opportunities, so buyers pay somewhat lower prices for their investments. This stops healthy markets and economic climate from turning into a mania. It also improves the investment results that buyers are likely to enjoy in the years ahead.

Think more about value and growth investing strategies to improve your long-term investing

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Academic studies suggest that on average, value investing produces better results than growth investing. But these studies mostly look back on what would have happened in a particular historical period, if you followed a particular set of rules. Most distinguish between growth and income investing by looking at average p/e’s (per-share price-to-per-share earnings ratios). They assume high p/e’s are a marker for growth stocks and low p/e’s for value stocks. As any serious value or growth investor can tell you, it’s more complicated than that.

If you balance and diversify your portfolio as we recommend, it should include both growth and value selections. In both areas, however, you should avoid extremes.

Use our three-part Successful Investor approach while making stock picks and improve your long-term investing:

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

Some investors believe they can time the market and they don’t worry about long-term performance? What successes have you had with timing the market?


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