The Secret to Avoiding Investing Disasters

What can investors learn from Air France 447?
A lot more than you might think. This point was driven home a few days ago after I watched a BBC documentary on the doomed flight.
To refresh your memory, Air France 447 was a state-of-the-art Airbus A330. On the night of May 31, 2009, Air France 447 departed Rio de Janeiro for Paris. A few hours into the flight, on the morning of June 1, Air France 447 crashed in the Atlantic off Brazil’s northern coast. All 228 aboard perished.
A confluence of avoidable events led to Air France 447’s eventual demise.
The events were set in motion when Air France 447 flew into turbulence and storm clouds that produced ice crystals that blocked the A330’s pitot tubes –  devices that provide critical information about aircraft speed. The A330 had been on autopilot. But because the pitot tubes had become blocked, no useful information could be discerned, so the A330’s computers kicked out of autopilot to hand the flying back to the pilots.
The blocked pitot tubes themselves were no emergency. Once the A330 had passed the storm clouds, the ice would have melted and the pitot tubes would again become functional.
Unfortunately for Air France 447, it would never fly past the storm clouds. A rather mundane occurrence would soon be elevated to a tragedy.

An Unfortunate Pilot Intervention

The turbulence and the lack of information from the pitot tubes motivated the A330’s pilots to act when they shouldn’t have. Even though the A330 was out of autopilot, it would have remained stable while the pilots worked to set the jet into a safe flight configuration.
Not that much work was needed. According to the experts consulted by the BBC for the documentary, the safe flight configuration was to keep the A330 in its present configuration: Maintain the same altitude and same speed. Keep the jet level. That’s what got them to the Atlantic, and that’s what would get them past the storm clouds. In other words, stay the course.
But as is so often the case, inappropriate action trumps inertia. Instead of staying the course, one of the co-pilots reacted to the turbulence by pulling back on the control stick, which pitched the A330’s nose skyward, causing it to climb at a sharp angle.
That was the first mistake.
Unfortunately, every subsequent action the pilots took to remedy this initial mistake only compounded it to a point of no return. A perfectly sound jet, its passengers, and its crew would pay the ultimate price.

Investing Disasters: The Chain of Events

While watching the BBC’s Air France 447 documentary, an investing analogy sprang to mind: Investors frequently react to market turbulence, or market volatility, to be specific, similarly to how the Air France 447 pilots reacted to weather volatility over the Atlantic.
The investor acts, but the initial act is soon revealed as a mistake, and then every subsequent act taken only compounds the initial mistake. A Rubicon is reached. There is no pulling out, and before the investor knows it, he’s crashed his investment portfolio.
I’m an income investor; I imagine most readers of this article are income investors too. I’ve been income investing for over 25 years. If my experience has taught me anything, it is to stick with what got me here, regardless of immediate market volatility.

Elements of Sound Investing

And what got me here? My focus on the following elements, all of which are discerned before I buy an investment:

  • Income – Income continuity and growth ensures an eventual share-price recovery.
  • Capital Structure – A sound capital-structure (i.e., low debt, high liquidity) ensures long-term survival.  This holds for company and investor alike.
  • Value – Established cyclically depressed companies frequently offer the best entry prices. Never extrapolate events of the day into perpetuity.
  • Patience – Wealth accumulation requires time. Rome wasn’t built in a day, and neither are investment portfolios.
  • Inertia – When volatility hits, maintain the course. Do nothing.

Of course, a disaster with loss of life, like Air France 447, is a far greater tragedy compared to any disaster an investor can impose on his portfolio. But if investing disasters can be easily avoided simply by maintaining the course, why not maintain the course and avoid disaster?

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