Don’t Fear the Fed – Fear Your Fear of the Fed Instead

What kinds of feelings do you get when a major market-moving event is approaching? Fear, anxiety, loathing? It’s normal and natural to have these feelings, but they won’t benefit you as a long-term investor in great businesses.

The “right” emotion to have is either none at all, or eager anticipation of getting to buy stocks on your shopping list. Many people have shopping lists for the holiday gift-giving season, but they’ve never taken the time to put together their wish list for the time when stocks go on sale.

If you don’t have such a list ready, you’re in luck because there’s still time. People often want to know whether the Federal Reserve will hike interest rates 75 basis points, or more, or less. They’re also anxious to know whether Fed Chairman Jerome Powell will use dovish or hawkish language during the FOMC meeting.

Instead of trying to second-guess what the Fed is going to say or do, consider choosing not to play that game, which is awfully hard to win on a consistent basis. There are hedge funds devoting vast amounts of capital and human resources toward this endeavor and they can’t get it right, so you don’t need to waste your own time and effort.

Sure, Powell might say some pleasant-sounding things and the stock market could rally for the next month. After all, November and December are seasonally strong months of the year for stocks, and it would be a shame to miss out on a huge rally even if it’s somewhat irrational.

Hence, I don’t recommend just sitting in an all-cash position, waiting for lower prices. Just a few magic words from Powell could spark a wild run-up in stocks, and then you’ll either have to buy at higher prices or just sit helplessly on the sidelines.

Courtesy: MarketWatch

At the same time, it’s fine to have some “dry powder” or cash in your investment account ready to scoop up shares of high-conviction companies at lower prices. Stocks could just as easily fall as they could rise after Powell’s speech, and having no cash at all would mean missing out on some great buying opportunities.

Even if stock prices tank, you don’t have to go all-in immediately. There’s still another FOMC meeting later this year, and this could usher in even better prices. Remember, if you like XYZ stock at $50 and nothing about the company or economy has suddenly changed for the worse, then you should like the stock even more at $40 or $30.

This attitude has worked out quite well for highly successful investors like Warren Buffett and Charlie Munger. You can follow their lead, or you can follow the crowds if you prefer. However, following crowds has a horrible track record in the financial markets.

For instance, the crowds would have told you to stay out of the stock market in October. They’d have said that the markets will be weak and we could have had a market collapse like October of 1929, 1987, or 2008.

Or, you could have stuck to your core principles and been a leader instead of a follower. As it turned out, the Dow Jones Industrial Average gained nearly 14% in October, posting its best month since 1976.

Courtesy: Bespoke Investment Group

The self-appointed gurus would then have complained that the stock market “should have” gone down instead of skyrocketing in October. Personally, I’m less concerned with what should have happened, than with what is actually happening.

Even after October’s robust market performance, there are still pockets of value to be found and capitalized on. Semiconductor stocks are particularly disliked at the moment, for example. Currently, investors are almost behaving as if the world won’t need microchips anymore.

They might continue to feel that way for a while longer, since financial markets are driven by sentiment in the short term. When you see chip stocks with single-digit P/E ratios, though, that’s a signal that these companies are still profitable and the stocks are reasonably priced compared to their earnings.

The problem for many people is that there’s still that little voice in their head, telling them not to buy anything because stocks can still go lower. That’s fear talking, and it has a place in our everyday lives – but for superior long-term portfolio performance, it’s best to steer clear of the fear.