This week two stocks, CSL and James Hardie, had shockers. But why? And how should investors treat scenarios like this?

This week two stocks I liked (i.e. CSL and James Hardie [JHX]) had share market shockers when their respective CEOs were telling the investing market about what had happened to their companies’ bottom lines and what they expected was going to happen ahead.

And the stock market “bloody well didn’t like it”, as the UK comedian Alexi Sayle would say in one of his memorable characters.

For the record, CSL had its worst one-day loss of over 15%, while JHX slumped 25% on the day of its results, and a further 35% the very next day. These drops make my general investing principle of being happy to buy quality companies when the market has dumped them look a little bit suss.

But am I worried?

No, even though I waved goodbye to a number of thousands on CSL and could’ve done the same with JHX, but I’ve been too busy to give that stock a go.

Thank God for being busy!

So, why am I OK with losing on CSL? Blame the work of the ancient philosopher, Seneca, who said the following about life, but it’s spot-on for anyone trying to build wealth though investing in stocks:

“It’s ruinous for the soul to be anxious about the future and miserable in advance of misery, engulfed by anxiety that the things it desires might remain its own until the very end. For such a soul will never be at rest, by longing for things to come. It will lose the ability to enjoy present things.”

To be honest, I was never in the market for a philosopher until I came across this line from Seneca and his stoic buddies. I was happy when made aware of these thinkers of Greece and Rome who pretty well worked out the best way to cope with the stress-creating events and people we’re bound to cop in living our lives.

I don’t know why I have been “philosophical” about enduring loss without being ruinously preoccupied by the lack of winning.

I suspect it’s because I played team events most of my life. While it’s nice to win grand finals (and I was part of a few of them in my time), it’s the joy of the activity that was more important, which had cream on the top if you took home the cup or the flag out of the finals.

As a consequence, when I was forced into competing with and therefore understanding the stock market, first as an academic economist, who had been thrust into financial market commentary for the likes of the Daily Telegraph and the Triple M Network when the share market crashed in October 1987, and later as a financial advisor, it became like sport.

As with sport, while I wanted to win, I was realistic. You see, unlike playing 26 weeks and winning or not winning the competition or taking home the ultimate prize as an individual, with stocks it’s like the old line: “It’s better to have fought and run away, to live to fight another day.”

For me, while CSL is a disappointment, it has been offset by one of my current favourites, EX20, which is an ETF that collects the stocks numbered 21 to 200 in the S&P/ASX 200 index, which is up 12.7% over the past 12 months. And it’s up about 30% since I first came across this ETF when I though the top 20 stocks had run up too hard because investors were fretting about high interest rates.

My thinking was that when interest rates fell, the smaller stocks compared to the top 20 (i.e. the big banks, JB Hi-Fi, Wesfarmers, Telstra, etc.) would see their share prices rise.

This has taken longer to happen because rate cuts and killing inflation took longer than expected.

But how does EX20’s gain more than offset the CSL loss? Try these and it will explain why I like investing:

1. I put more money, lots more money into the likes of EX20 and other investments with many stocks in the one play, such as EX20 or with a fund with a clever manager with a great track record.
2. When it comes to individual stocks, I hold about 20 which means I’m not dependent on the CEO who performs badly, like CSL and JHX, or who are bowled over by a surprise economic slump or a crazy government policy, like tariffs from a tricky US president!
3. Provided the company is a quality business, they inevitably turn it around and come good.
4. Many of my investments will pay dividends, which often are better than safe term deposits, but they have the potential of seeing the share price go through the roof. For me, the millionaire’s factory i.e., Macquarie Group (MQG) has done exactly that and in spades, as the chart below shows.

Macquarie Group (MQG)

I bought this stock around 2005 in my self-managed super fund (SMSF) for around $50 and saw it surge to around $100. Do you think I thought the then CEO Alan Moss and I were geniuses? Yes, definitely yes!

But the GFC hit and MQG went under $17 because it was a bank and the GFC stood for Global Financial Crash! Using my investing rule of thumb that this was a quality business I’d bought at such a good price, I bought more at $25 to lower my average cost down to $37.50. But the GFC got worse with the failure of Lehman Brothers in September 2008. MQG’s price fell even more. Then Treasurer Wayne Swan, coached by his Treasury Secretary, Ken Henry, effectively told the world and local savers and investors that the Australian government stood behind its banking system and Macquarie’s share price recovered.

The rest is history. While the actions of Swan and Henry helped, the investment strategy of investing in quality when markets get panicky and go crazy has proved to be a winning strategy over time. All I have to do is not get anxious or depressed about what I can’t control. I do that by investing in good stuff and not be negatively affected if I and my investments have a run of outs.

It's better to invest and lose temporarily than never to have invested at all. This one chart shows you why simply investing in the Australian stock market through say IOZ, or A200 or any other ETF for our stock market pays dividends over time, if you’re patient like a stoic.

IOZ

Since IOZ was created by iShares in 2010, you would’ve made nearly 80%, each year it paid around 4% + in dividends. And then there are franking credits that can also add more, especially if you invest through an SMSF.

History says a stock market returns about 10% per annum over a 10-year period. Maybe it’s because I’ve been an economic historian, as well as an economist, it’s easy for me to find investments that don’t make me worried and depressed.

But I know who I am, which has helped.

As one of the most celebrated philosophers Marcus Aurelius said: “Today, I escaped anxiety. Or no, I discarded it, because it was within me, in my own perceptions, not outside.”

For the record, Marcus Aurelius was the Roman Emperor who figured in the film Gladiator that Russell Crowe starred in. While the film was fiction, Marcus and my investment stories and lessons are works of non-fiction!