HOPE: It’s human nature to be optimistic. It’s human nature to hope. Furthermore, hope is a component of a healthy state of mind. Hope is the opposite of negativity. Negativity in life can lead to anger, disappointment and depression. After all, if the world is a negative place, what’s the point of living in it? To be negative is to be anti-life.

Ironically, it doesn’t work that way in the stock market. In the stock market hope is a hindrence, not a help. Once you take a position in a stock, you obviously want that stock to advance. But if the stock that you bought is a real value, and you bought it right — you should be content to sit with that stock in the knowledge that over time its value will out without your help, without your hoping.

So in the case of this stock, you have value on your side — and all you need is patience. In the end, your patience will pay off with a higher price for your stock. Hope shouldn’t play any part in this process. You don’t need hope, because you bought the stock when it was a great value, and you bought it at the right time.

Any time you find yourself hoping in this business, the odds are that you are on the wrong path — or that you did something stupid that should be corrected.

Unfortuneately hope is a money-loser in the investment business. This is counter-intuitive but true. Hope will keep you riding a stock that is headed down. Hope will keep you from taking a small loss and instead, allowing that small loss to develop into a large loss.

In the stock market hope get in the way of reality, hope gets in the way of common sense. One of the first rules in investing is “Don’t take the big loss.” In order to do that, you’ve got to be willing to take a small loss.

If the stock market turns bearish, and you’re staying put with your whole position. and you’re HOPING that what you see is not really happening – then welcome to poverty city. In this situation, all your hoping isn’t going to save you or make you a penny. In fact, in this situation hoping is the devil that bids you to sit — while your portfolio of stocks goes down the drain.

In the investing business my suggestion is that you avoid hope. Forget the siren, hope — instead embrace cold, clear reality.

So, how can ordinary investors apply the academic evidence – the lessons learned from more than a hundred years of rigorous research? How can they apply that to achieving their financial goals?

Well, this might sound dramatic, but the work of Louis Bachelier, and of Nobel Prize-winners like Samuelson, Sharpe and Fama, should make us question almost everything we thought we knew about investing; and almost everything the financial industry and the media tell us we should be doing. Let’s watch….

“If you are serious about investing and building wealth the video documentary series ‘How To Win The Losers Game” is a must see. It’s excellent. 

After watching the video if you want to learn more about better low-cost, long-term, low-maintenance, diversified investment strategies, download our free guide “12 Essential Ideas For Building Wealth” by clicking on the banner at the top of this page.

Paul Philip, Financial Wealth Builders Securities

If you have invested for any length of time, you will have heard the expression “Past results are not an indication of future performance.” The best in our industry not only agree with that but some feel that in the coming years we should prepare ourselves for lower returns than we are used to. If the markets are indeed prepared to not be as generous, then keeping fees as low as possible has never been more important. We need to keep as much of the overall return as possible… CLICK HERE to watch the video

The Evidence-Based Investor Video series is a service provided by Paul Philip and the team at Financial Wealth Builders Securities

[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and editor of Price Value International.]

In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist Mike Tyson:

“Everyone has a plan ‘til they get punched in the mouth.”

Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:

“No battle plan ever survives contact with the enemy.”

The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.

This bear has so far been quick, and indiscriminate: the US; Europe; China; stock markets have fallen sharply, internationally.

Investors, being human, have scrambled in search of an explanatory narrative.

Some have blamed the Fed’s baby steps towards raising interest rates. Some blame the collapse in the oil price.

Last week’s movie night showed David Cronenberg’s 2012 thriller ‘Cosmopolis’, which has Robert Pattinson playing a 28-year-old hedge fund billionaire losing his entire fortune in a single day due to the unexpected rise of the Chinese renminbi.

Other than getting the direction of the renminbi wrong, the movie could have been shot yesterday.

But it has certainly been a good week for bears.

Last week RBS told us to “Sell everything except high quality bonds”. This is somewhat problematic since there aren’t actually any high quality bonds out there.

Tuesday brought us SocGen’s Global Strategy Conference, where guest speaker Russell Napier pointed out that growth in emerging market foreign exchange reserves from 2008 to 2014 amounted to the most rapid increase in emerging market money supply in history.

As this process goes into reverse, emerging market growth will clearly suffer.

And since many emerging market countries have over-borrowed in foreign currencies, the fighting in the global currency wars is set to get more intense this year.

As Napier warns, 2016 has also ushered in new rules requiring bond and deposit holders to be bailed in when banks blow up.

The EU (and many of its bank depositors) will come to regret not restructuring their banking system during the seven years post-Lehman when they had the opportunity.

The search for an easy narrative to explain the bear market is probably a waste of time. The financial market is a complex adaptive system and investors are prone to irrational behaviour and mood swings.

They are also prone to overpay. The great ‘value’ investor Benjamin Graham reminded us that,

“Operations for profit should be based not on optimism but on arithmetic.”

The optimists have had things their own way in an almost unbroken line since March 2009. January 2016 so far would suggest that the pragmatists are now in charge.

So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:

1) Diversify by asset type.

2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).

3) Concentrate any debt exposure to bonds issued by creditors, not debtors.

4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.)

Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.

5) Complement traditional investments with alternatives.

We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.

6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.