No Pain No Gain

November 22, 2011 11:42:00 AM

As I have discussed in previous commentaries, I believe two of the most important variables to successful investing are market volatility and dollar cost averaging. Why? Because volatility creates the opportunity to take advantage of buying into companies we want to own at lower prices.

The unfortunate component here is that investors don't like volatility. History has shown that investors shy away from volatility and uncertainty when it comes to investing. They have a tendency to either sit on the sidelines, or as we have seen recently, put their money into cash, bonds and bond funds.

I believe this behavior is prevalent among investors because they do not have a clear understanding of how or where their equities are invested. They realize they are invested in the market, but do not understand where they are invested in the market, or why.

Such uncertainty can be uncomfortable for many investors, so instead of taking advantage of buying into a quality investment they wait until markets or the stock price has moved higher which in turn helps them feel like it is safer now to invest. Unfortunately, some investors even turn to choices they better understand -- including not investing at all!

If investors better understood the companies or industries in which they are invested, I believe they would be more apt to invest (or continue to invest) through dollar-cost averaging into such investments when they are on sale. Remember one of Peter Lynch's investment rules: Know what you own and why you own it. After all, when a business owner has a bad quarter or a bad year, do they sell their company? Of course not! They adjust and continue to invest (dollar cost average) into their business.

Remember, as Warren Buffett has said, look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

Interestingly, during the stock market correction in 2010 and the current correction here in 2011, investors continue to move money out of equity mutual funds and move their money into cash or into bonds/ bond mutual funds. Clearly, in both good times and bad times, the typical behavior of many investors is that of the herd mentality. Unfortunately, I believe this behavior is primarily driven by investors' lack of clarity in knowing what investments they own and why.

As corrections fade into the sunset, opportunities to invest in companies on sale become more difficult and therefore investors must be patient to wait for the companies they want to own to go on sale again, hopefully at lower prices!

The good news here, however, is that if you are an investor in companies, and not the stock market, there are always opportunities to be dollar-cost averaging into companies you want to own!

As we like to say: stock market pain for long-term gains!

Mark Pearson

Mark Pearson

Mark Pearson

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