Investing, today, can mean wonderful opportunities and terrific risks. The investor’s dual goals of building wealth and protecting wealth require a sound method. The method must include consistency, objectivity, adaptability, reliability and humility. Anything less we find unacceptable.
Down through history, there has always been some logical argument to stray from your path as a serious, long-term investor. To stay the course sometimes requires a little extra confidence. Today’s temptation to stray is a good one . . . Long term investing in companies, over time, has shown to be, we believe, the best proven approach to building and preserving wealth. Long term performance of stocks is determined by the success of the company.
For example, an investor with a 20-year horizon for his long term portfolio might be holding 60% stocks and 40% bonds. If he happens to believe stocks are the preferred investment for this money, the question is “Why is almost half of your portfolio in bonds?” The answer typically is to smooth out short term volatility of the stock market. Notice this answer contains “short term”. So, a good part of his long-term money is now invested with a short term goal. How do bonds perform long term compare to short term? That difference can become a brutal cost in this example. Also, is there a real financial benefit to smoothing out short-term volatility? Or, is it a non-financial benefit, like peace of mind, or the ability to sleep. These might be nice, but there can be a very large cost in long-term underperformance. Cash and bonds can be very expensive shock absorbers for the jittery long-term investor.
The one on the left represents all that you know. The one on the right signifies all that you do not know. The middle one we’ll talk about in a minute. Are these drawn to scale? No way! Your circle is enlarged thousands of times just to be able to see it on a piece of paper. The large one was reduced at least as much since it would be gigantic, larger than the universe. These visuals will just have to do for our talk.
The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
John Wooden can still identify the worst step he ever took in his retirement planning. It happened in 1948. That's when the storied UCLA basketball coach accepted the post in Westwood. It was a step up from his head coaching job at Indiana State, though his second choice after the University of Minnesota (which was an hour too late in calling to offer him the job). When the offer came in from UCLA, Wooden told me the other day, he didn't ask a lot of questions.
A look into the future is right under our noses. Why are the markets not reflecting the grim economic realities with which we're faced? The fix is in remembering that the market doesn't look at today. It looks at tomorrow. We're looking at the news from Wall Street, when perhaps we should be listening to Broadway. Remember the song from 'Annie'?
Probably the most malicious, the most damaging fallacy perpetuated by traditional investment thinking is absolutism. It spawns entire schools of thought that can send the faithful follower toward financial ruin. Should I take on risk? Is investing right for me? How much should I invest? These options do not exist. To even ponder them is to waste time and to impair clarity that is requisite to investment success. To get to the core of this, we must again quote Albert Einsten. Maybe someday he will, posthumously, be ordained as the true father of investing. Einstein never said, "You know, some things appear to be relative to others" Einstein said, "Everything is relative". This revelation should be the foundation for any sound perspective on investment. 'Modern Portfolio Theory', if viewed in the pure light of relativity has failed miserably. Historical patient data show that through flouride and regular dental hygiene, dentistry has served the patient well. Historical investment return data show that 'traditionally accepted' investment advice has not served the client well.