Rational Investing

by Clark Davis

I am interrupting my series, "PRIMED For Success: Rational Investing In Irrational Markets," in response to the concerns I am hearing about the state of the stock market. The current volatility is unnerving many investors who profess to be long-term, but who have growing worries about what is going on.

Rational investing is really just common-sense investing. It is neither faddish nor short-term. It is the difference between chasing stocks at any price and owning good companies at reasonable prices.

I have written and spoken often on the difference, and while some of my observations are of limited value (especially those about my golf skills), I want to repeat edited excerpts from previous columns that have bearing on the current situation.

From April 6-12: Don't let any book or self-appointed guru convince you that the market will always go up and that you should always buy every stock on any dips. We have been experiencing the greatest bull market in our lifetime.

Far too many investors, mutual fund managers and brokers with limited experience have come to expect in excess of 20 percent returns, in spite of the historic average return of 11 percent that the market has produced from 1925 through last year.

Markets do not go up forever, trust me. If you were an investor during '73-'74 you know how devastating and confidence-jarring a bear market can be. Be realistic in your expectations, invest with a selection process that will enable you to sleep nights if the market falls 20 percent, and stay your course not that of someone else.

From May 4-10: The market has become troublesome. ... In my last column I discussed my concerns about the extreme overvaluations of almost all of the 30 stocks which comprise that venerable average. ... I do see signs that are flashing a caution light. ... There is much too much focus on Dow 10,000.

The stocks of many large companies have been bid up to irrational levels as managers of large pools of assets (mutual funds, large money management firms, major trust companies, etc.) have had to put to work the large inflows of cash they have received.

Because of their size, it is easier for them to invest in the "big names" that have a lot of stock outstanding the type of names such as those in the Dow Jones Industrial Average.

That has created an interesting situation in which they buy the "big names" which drives prices higher which causes the market to go higher which increases investor enthusiasm (read greed) which causes investors to throw more money at the money managers which causes the money managers to buy more of the "big names" which ... and so on.

When the euphoria that fosters greed turns into worry that generates fear, this greatest of all bull markets will stumble, hesitate and then teach many inexperienced investors that the old saying is true, "In a bear market, money returns to its rightful owners."

Will every investor's portfolio decline in value? Yes, but not at the same rate or with similar magnitude. Those investors who are experienced and who limit their investments to high-quality issues with strong underlying fundamentals and reasonable valuations will see the best returns.

Those who have been caught up in the euphoria of trading overvalued stocks on the basis of their price momentum, and have "confused brains with a bull market," will see the worst.

This is a time for extreme caution and the very careful selection and monitoring of investments.

Perhaps I will be proven to have been overly cautious, but 30 years in this business, through bull and bear markets, has taught me that in periods of uncertainty, it is better to err on the side of conservatism.

If you have not established an investment discipline for all markets, not just the booming ones, get with your accountant or financial adviser and do it now. Remember, it wasn't raining when Noah started building the ark.

Note: I have been called by a lot of names over the years. With a simple name like mine it is amazing how I have been introduced or addressed. How about "Mr. Clark?" An understandable mistake. Or "Davis Clark?"

My favorite is "Mr. Kent," obviously referring to a fellow who comes from Metropolis, a town about 30 miles from where I grew up, and who is faster than a speeding bullet.

Now I am an official member of the SBJ 5, which, it is hoped, will not cause any name confusion of the sort created by the Dave Clark Five.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, PO Box 1365, 65801, or by e-mail at clark@slia.com.)

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