investment advice

Outcomes May Vary

© Can Stock Photo Inc. / bedo

After the recovery from the 2007-2009 financial crisis, we had some time to converse with clients about how well things had worked out in the end. Memories of the turmoil had faded and account values began to make new highs.

The less-financially-involved spouse in a client couple interrupted this discussion to say, “I just have one question. A lot of our friends lost half their money in the stock market, a couple of them even had to go back to work after being retired. Aren’t we in the stock market, too? How come we came out OK and they did not?”

You probably know the answer to the question. Most of the unfortunates who lost half their money turned a temporary downturn into a permanent capital loss by selling out at low levels.

Please notice how we characterized the panic. The failure of big institutions, waves of mortgage defaults, unprecedented action by Congress and the Federal Reserve, massive dollar losses in the markets, and economic turmoil with high unemployment and massive uncertainty are all wrapped up in the phrase “temporary downturn.” But that is not what the unfortunates perceived. It isn’t truly how it felt in real time to nearly all of us who held on, either. We all experienced concern or fear or anxiety.

So we all faced the same circumstances, a series of major economic and financial events that were beyond our control. The thing that mattered, however, was the one thing in our control: our reaction to these events. From the perspective of the long view, by putting these events in the context of history and properly judging them over the decades of a lifetime… we see that ‘temporary downturn,’ not a panic that compelled us to ruin our financial position.

Most of our clients lived through episodes of 10% unemployment before, 16% mortgage interest rates, no gasoline at the gas stations, and inflation devaluing our money at double digit rates every year. This is not to mention wars, assassinations, school children coached for nuclear disaster, and recession after recession. All of these difficulties proved to be transitory, producing only temporary downturns.

Long term investment success does not require perpetual optimism or rose-colored glasses. It does take, however, either a sense of confidence that we will handle whatever challenges may come our way—or a resolution to maintain our investment strategies anyway. We covered the End of the World Portfolio in a prior essay and reached the same conclusion.

From a tactical standpoint, we do need to know where our income will come from, and have the stores of cash we need for short term goals. Our comments above pertain to long-term or permanent capital. It makes sense to consider reducing volatility at market high points if that better suits your needs, and we’ll be talking about that when the markets recover.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.

Data vs. Wisdom

© Can Stock Photo Inc. / kentohIf you are an avid news reader, you are subject to a flood of information about the world. We read about everything from wars to weather, science, scandals, politics and gossip. This adds up to a wealth of data available to an informed investor to make decisions with.

Here’s the problem: most of it is useless. When you see a headline that seems to affect your investment choices, everyone else is seeing the same thing—and is already factoring that news into the stock price, good or bad. The entire vast store of public knowledge is of no use to us when the market condenses and distills all of that data into a single measure: the company’s publicly traded stock price.

Some economists go one step further and say that investment picking is fundamentally useless, because markets are so good at determining the fair price of an asset that it is impossible to find an undervalued asset. This is called the “efficient market hypothesis.”

However, we can see a flaw in this hypothesis: it rests on the assumption that human beings are rational. We’ve already noted that people are irrationally loss averse and prone to exaggerate market swings. When the stock market fell by 50% from June 2008 to March 2009, it wasn’t because half of our collective corporate wealth magically went up in smoke. We were seeing irrational market swings in action.

It is virtually impossible to beat the market using all of the data that goes into the market in the first place. Instead, we believe we can achieve positive results by using simple fundamental principles to avoid irrational stampedes and find undervalued bargains.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Why Busts Turn Into Booms (and Vice-Versa)

© Can Stock Photo Inc. / Coprid

We know that the markets are cyclical. They go up-down, up-down.

Listening to the news, you’d never know this. When gas hit $4 a gallon several years ago, headlines said it would go to $7 or more—but instead of doubling, prices fell by half. This shouldn’t be a surprise, especially for those of us old enough to remember the oil crisis of the 1970s. The glut of oil we see today is really just a symptom of the shortage a few years back.

When gas is scarce and prices are high, nobody wants to use any. People drive less, take fewer trips, and buy more efficient cars. At the same time, oil producers start falling over themselves to drill everything in sight. Eventually, the high prices cause demand to shrink and supply to grow.

We know what comes next: oversupply and plummeting prices. Now producers are spending too much money pumping cheap oil and have to close down plants. At the same time, people get used to cheap gas and start burning it freely. Truck and SUV sales go through the roof and people drive more miles. We think we know how this one ends, too.

Every glut plants the seeds of the next shortage, and every shortage plants the seeds of the next glut. We can see this happening in real time with oil and other natural resources such as iron and copper. It holds just as true with every other market in every other age—cattle, corn, and cars, smartphones and other gadgets, even abstract “goods” like movies and music.

Timing is nearly impossible to predict, and investments can be volatile and difficult to own. But by understanding how the process works, patient investors may profit. Today’s bust may be tomorrow’s boom.

Lessons in Letters: The Wisdom of Warren Buffett, Part 1

Downtown Omaha skylineWarren Buffett, the Oracle of Omaha, is a widely acclaimed investor and businessman. He is not perfect and he has been controversial at times. However, to our knowledge Buffett has made more money investing than any other human being on the planet. So he has that going for him, which is nice.

Almost 40 years’ worth of Buffett’s annual shareholder letters are available at www.berkshirehathaway.com. They provide a wealth of information on his views, methods, and insights. Some things from 1977 have gone away, like VHS tapes and KC & The Sunshine Band, but Warren Buffett’s letter for that year contains some timeless insights.

“Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day.”

He goes on to write,

“We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

Notice that his focus is on the business, not the stock. Buffett did not build his fortune by worrying about short term price swings. He considers his investments in terms of many years, not day to day prices. And he understands that the best way to build wealth for himself and his investors is to buy great companies at bargain prices. For Buffett, falling prices are a buying opportunity rather than a source of pain and anguish.

Buffett’s insight is remarkable in a market dominated by short-term trends—as are his results. There is a lot of wisdom in these words, and we will frequently return to Buffett’s letters as a source of guidance. In the meantime, like Buffett, we continue to seek the best bargains on the market and cultivate our investment “orchard” for long-term growth rather than trying to sell if for short-term reasons.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

About “The Coming Monetary Collapse”

Ruined headlines about economic collapse

Recently, a retired worker popped into the front door to ask, “Mark, have you heard about the Coming Monetary Collapse?”

This, of course, was news to me. It eventually became apparent that this “news” came from an advertisement on the Internet. We see these ads every so often on financial news sites. They seem to look like reputable-looking news articles but in the end they always try to sell you something, typically expensive subscription services that will supposedly help you sidestep the “inevitable” collapse.

If someone actually knew enough to forecast an impending financial downturn, they wouldn’t need to be selling you advice in order to get rich—they’d already know everything they needed to make themselves rich beyond their wildest dreams. And if the collapse was all that catastrophic, all of that money wouldn’t do them any good anyhow. If you were convinced a worldwide monetary collapse was coming, here’s what you should invest in: canned food, ammunition, and generators. You don’t need expensive books and online seminars to tell you that.

(Incidentally, clients have told us about friends of friends who were convinced of global collapse and tried that investment strategy years ago. Last we heard, they were trying to sell used generators to rebuild their retirement funds.)

These sales pitches are often dressed up as actual news articles, but they’re pure scare tactics. They want to sell you something, and instead of promoting their advice on its own merits (it has none), they are trying to play to your fears.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.