Nick’s Note: At Palm Beach Research Group, we believe in rational investing. We use prudent position sizing, make sure we have exit strategies in place, and don’t make decisions based on our emotions.

No one epitomizes this type of level-headedness more than my friend and colleague Chris Mayer. Not only is Chris one of the best investors I know (over a recent 10-year period, he delivered average annual performance of 16–17%), he’s one of the safest, too.

In today’s essay, Chris explains how he remains calm in an unpredictable market. It’s a lesson you can apply to your everyday life, too…

By Chris Mayer, editor, Bonner Private Portfolio

Welcome to 2018. Pull up a chair and stay awhile.

We all have the same questions: What awaits us in 2018? What dangers lie ahead? What opportunities? What to do now?

Before we get to our answers, I have a parable to share. It will help get you in the right frame of mind.

I first read it in a book by Alan Watts (1915–1973), who was a popular speaker and writer mainly on Eastern wisdom as found in Zen, Buddhism, Taoism, etc. Below is my rendition of the story.

The parable is about a farmer. One day, he forgets to latch the barn door and his horse escapes.

“That’s bad news,” his neighbors tell him.

But the farmer is more circumspect. “Maybe,” he says.

The next day, the horse returns… with several other wild horses as well.

“Wow, that’s great,” the neighbors say.

“Maybe,” says the farmer.

The next day, the farmer’s son breaks his leg after being thrown by one of the new horses.

“That’s rotten luck,” the neighbors say.

“Maybe,” says the farmer.

The next day, there is a war. Men come to the village to draft soldiers. The farmer’s son does not have to go.

“What good luck,” the neighbors say.

“Maybe,” says the farmer.

You get the point of the story.

You can never really be sure how things will turn out. Bad news may, in fact, lead to a good outcome down the road. And vice versa. I agree with the author Kurt Vonnegut, who said, “The truth is, we know so little about life, we don’t really know what the good news is and what the bad news is.”

The market provides abundant examples of the parable in action.

I remember a point early in the year when one of the recommendations in Bonner Private Portfolio, Rolls-Royce (RYCEY), fell 9% in one day after a “bad” earnings report. More than one reader wrote to me with worried thoughts. We said buy.

The stock is up over 40% since.

Or consider a counter example: U.S. stocks, by and large, had a very good year in 2017. The S&P 500—a broad index of large U.S. companies—delivered a 22% return.

Good, right?

Well, maybe not.

For one thing, it is very hard to find bargains in the U.S. stock market today. Prices look rich for many stocks. The risk of buying something expensive and suffering poor returns or losses is higher now.

Time will tell if the generous gains of 2017 stick or whether they merely set the stage for a difficult 2018.

Thus, the parable nudges you to take the happenings of life with equanimity. You never really know.

A Mountain of Dishes

I had been reading Watts over the holiday break and I shared bits here and there with my family. I would like to share one other story from Watts you may find helpful as you think about the road ahead.

Watts writes about the frustration or dread you may feel upon realizing you have a large or repetitive task ahead of you. He likens it to having a pile of dishes to clean. Here is Watts in his own words, from Eastern Wisdom, Modern Life:

You begin to think as you wash them that you’ve washed dishes for years, and you’re probably going to have to wash dishes for the rest of your life, and then in your mind’s eye you see this prodigious pile of dishes piling up as high as the Empire State Building… and you are appalled and oppressed.

But dispelling this dread isn’t a matter of trying to forget about washing dishes, it is realizing in actual fact you have only one dish to wash, ever: this one; only one step to take, ever: this one.

I told this story to my 15-year-old daughter. She remembered it, because a couple of days later, after dinner, I complained about not wanting to do the pile of dishes. (True story.) My daughter gleefully pointed out, “But Dad, you only have to do one!”

Well, she’s right.

The Right Frame of Mind

What awaits us in 2018? What dangers lie ahead? What opportunities? What to do now?

We answer these questions with a question: Remember Watts and his story with the dishes? We will deal with the year as it unfolds day by day. Better to live in the present. There is no future. There is no past. Only the present is “real.”

We think most people spend too much time and energy trying to predict things they can’t predict (such as the stock market). They worry incessantly over imagined problems. We’ve preached a different message in my Bonner Private Portfolio newsletter: Focus on the businesses you own and how they can create wealth over time.

A business is like an organism, or perhaps a machine. You can understand how it works. And you can use this understanding to gain a real edge over the market. This is what we focus on.

For now, keep a good amount of cash in your portfolio. We have 30% in cash. There will be times to put that cash to work. 2017 was a strange year in that it was the only one on record in which the S&P 500 recorded a gain every single month. It is unlikely to repeat, hence the value of dry powder.

Regards,

Chris Mayer
Editor, Bonner Private Portfolio

CHART WATCH

Bitcoin’s Volatile Ride

Bitcoin briefly fell below $10,000 per coin on Wednesday. And it’s down about 42% from its December 2017 highs.

That’s got many people worried. Some have even written in to us wondering what’s going on.

Regular readers should know this is par for the course in the cryptocurrency space. Volatility is part of the game. And bitcoin is no stranger to large pullbacks.

As you can see above, bitcoin had five major “crashes” in 2017. But it still finished the year up about 1,300%.

Like many new asset classes, bitcoin and other cryptocurrencies are volatile.

As Palm Beach Confidential editor Teeka Tiwari has said in the past, the key to surviving these periods is to control your emotions.

Here’s what Teeka recently told his subscribers: “Make sure your position sizes make sense relative to your net worth and don’t despair when we do go through a down period because we will, it’s unavoidable… The key is to have the correct mindset and know that it is just simply a blip along the road to a much, much, much higher valuation.”

We stand by that advice.

—Nick Rokke

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