long term investing

The Monster Under the Bed

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When we were small, some of us had older brothers who tried to convince us there was a monster under the bed. You may be surprised to know there is a corollary in the world of investing.

The monster promoted by some is generally called “the arithmetic of losses.” The arithmetic of losses is a simple mathematical observation that from a given number, if you take a certain percentage decrease, and then an equal percentage increase, you wind up lower than you started–even though your increase and decrease were proportionately the same. For example, if you start with $100, and lose 20%, you are at $80. If you gain 20% of $80, you’re still only back to $96. But we are here to tell you, there is no monster under the bed.

Consider that when a major stock market index declines by 50%, it then does need a 100% gain to get back to even. This is just arithmetic. But consider: whenever a stock market index is at an all time high, that is conclusive proof that the “arithmetic of losses” is a bunch of baloney.

Each all-time high means that the index has successfully come back 100% from every 50% loss, 50% for every 33% loss, 25% for every 20% loss… and MORE. Every time, every loss thus far. The long-term history of major United States stock market averages speaks for itself, and incorporates all the losses and all the gains.

Some fearmongers say investors cannot live with the ups and downs that are a necessary and integral part of long term investing. Clients, you know we work hard to ascertain whether you could be suited to our philosophy.

Part of that philosophy is that temporary declines, no matter how sharp, are not losses unless you sell out. It is not always easy, but it has worked out. No guarantees about the future, of course.

If you can be turned into a chicken, then some operator who claims to ‘control risk’ or promises short-term stability AND long-term returns may get your money. Please keep in mind that every chicken, sooner or later, gets eaten.

The fearmongers are right about one thing: markets go up and down. You and we know this. We work hard to manage the money you need without having to sell out at a bad time. This is one of the keys to being able to get through the downturns.

Clients, we are striving to find bargains, avoid stampedes, and own the orchard for the fruit crop. These principles will not prevent volatility. But there is no monster under the bed. Email us or call if you would like to discuss this or anything else at greater length.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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

Have We Mentioned How Wonderful You Are?

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The foundational theory here at 228 Main is people can gain effective perspectives and productive attitudes about investing. It doesn’t matter if you were born that way or were capable of learning, you as a group are special. We believe your behavior is one of the keys to long term investment results.

Consequently, while some colleagues live with frustration as untrained customers fall prey to counterproductive behavior—selling out low, chasing performance, jumping on fads—you and we are appreciated for our mutual faith in each other. No wonder some advisors are looking for an exit strategy, and I’m planning to work to age 92!

You do the difficult things, like going against the crowd, listening to people at the salon or barbershop or café or water cooler, and yet still stay the course. A benefit of my long commute is time to think about the business. I spent a day recently pondering this: how might we make things better for you?

If we change our pricing philosophy to reflect total household assets under our management, including results through the years, we honor your role in creating those results. And if we price new clients a little higher for an initial period, we can offer small discounts for longevity to you longer-term clients. This would better reflect our values.

This presents two issues. One, we tinkered with the schedule over the years, and sometimes failed to update existing clients to the new schedule. Two, our general philosophy has been to use a volume discount based on net invested capital, excluding changes due to investment results. We need to figure out how to implement changes in a way that makes sense to you. We have no intention of chasing anyone down and asking them for more money. Our growth allows us to offer breaks where they have been earned (after all, it is ultimately you to whom we owe that growth!) without needing to claw back money from any clients.

Clients, you have heard us express admiration for the very special group to which you belong. We talk about the mutual benefits of our shared perspectives on investing. We have said in as many ways as we know how that your behavior is large factor in investment outcomes. The one thing we have not done is align the economics of our shop with those noble sentiments.

We are committed to doing so. We will be communicating the results of our work in the near future. If you have any questions about this or any other pertinent topic, email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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

Invest Wisely, Spend Well

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A client came in, hat in hand, apologizing profusely for requesting the withdrawal of a few thousand dollars. He seemed sure the request would upset me.

I’m opposed to clients giving their hard-earned money away to scammers or nephews buying bars, so I inquired as to the use of the funds. It turns out that his home needed a modification to accommodate his wife’s changing health.

Of course, I told him that I would be upset if he didn’t use his wealth to make the home improvement. Relieved, he told me that his previous advisor would get agitated about any withdrawals from his investment accounts. It sounded as if that advisor forgot whose money it was.

We devote most of our time and attention and thoughts and words to our version of investing wisely. But what is it all for? There is no reason to be the richest person in the cemetery.

A more balanced view is captured in the short phrase, ‘invest wisely, spend well.’ We aren’t suggesting that you chop down the orchard to sell it as firewood. But it is OK to use the fruit crop to make life better for you and people you care about.

The same lesson was driven home by other friends. In their 70’s, this couple took their extended family on a vacation to a fabulous destination. In the telling, she raved about how great it was while he silently shook his head. I asked him if he had a different opinion. He said they should have started those trips twenty years before.

Many of us need to be diligent about saving and cautious about spending in our working years. Building toward financial independence in the face of everyday expenses can be a struggle. If we do it right, the struggle fades away as the years go by. At a certain point, we may need to warm up more to the idea of spending well.

Clients, we are always thinking about your long term financial position. Your situation seven or fourteen years from now matters—we plan on being here, and we plan on you being here too. But the idea isn’t to pile up the most money you can—it is to strive to have the resources to do what you want and need to do.

Invest wisely. Spend well. If you would like to discuss how this applies to you, please email us or call.


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

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

A Share of What?

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Some people invest in common stock without even knowing what the company does. To them, a stock is price on a screen that can be bought and sold minute by minute—day-trading, they call it. Those people study price charts, not financial statements.

At the other end of the spectrum, investor Warren Buffett understands that a share of stock is a piece of a business—a share in an enterprise. He once said it would not bother him if they closed the stock market for ten years: he is happy to own percentages of businesses.

We suspect that many of you have an understanding that is somewhere in between these two views. We would like to offer you a little more perspective on what ownership is, and what it means.

Recently, in analyzing a company many of you own, we broke it down to what $1 invested represents. We’ll call it Company X, the leader in its industry, a blue chip company.

$1 invested today, whether you just bought in or paid half that amount some years ago, represents a certain amount of revenues—sales of goods by the company. It also represents a share of income and dividends (cash paid to shareholders).

Each dollar of ownership value in Company X represents 32 cents worth of revenues this year. After expenses, the company’s net income for the year will be between seven and eight cents per dollar of today’s stock value. If the Board of Directors continues to approve quarterly dividends at the recent rate, each dollar of stock value will get close to 3 cents in cash dividends.

For long term owners, this year’s results are of interest but the outlook for the future has a large impact on how the stock price will change. For this reason, we seek to understand the relative value today, but also the potential for the company to reap its share of future growth in the American or global economy—to increase its revenues, income, and dividends.

This work is totally captivating, if you are us. Clients, many of you have told us this is why you hire us—your interests lie elsewhere. They say it takes all kinds to make a world; we’re glad to know your kind. If you’d like to talk about this or anything else, please call or email us.


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

Stock investing involves risk including loss of principal.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

The “Crash” of 1987: A Contrarian View

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The 30th anniversary of The Crash of 1987, the biggest one day drop in the stock market ever, recently passed. Mainstream commentary made much of the 20+% loss on the day, the panic, the shock, and whether such a drop could happen again.

People sometimes learn the wrong lesson from experience. (In our opinion, many investors learn the wrong lesson.) The so-called crash is another case in point.

First let’s put the event in context. The S&P 500 stock index went from 242 at the beginning of the year to 247 by the end of the year, with some commotion in between1. There was no apparent damage to long term investors when the dust had settled—provided one adopted sensible time horizons by which to judge it.

In fact, the next year saw a gain of 12% in the S&P 500, plus dividends1. The five years following 1987 notched a cumulative gain of 76%, plus dividends. This is why it might make more sense, in our opinion, to refer to The Great Buying Opportunity of 1987.

Those with unproductive perspectives measure the loss in the crash from the high peak the market reached earlier in the year. The S&P had jumped 39% in just a few months, even though interest rates were rising sharply and corporate earnings had stalled. From that frothy peak to the lowest closing price after the ‘crash’ was a drop of 36%1.

Clients, many of you were evidently born with the common sense to know that your perspective on events is a matter of choice. You choose productive, effective ways to consider things. Some of you weren’t born that way, but were able to learn how. Our work is intended for you who may benefit from it, not those who insist on counterproductive investing attitudes and behavior.

We believe the productive way to think about 1987 is as a year where the market saw a modest gain, before rising more significantly in subsequent years. The wealth-corroding way to think of 1987 is as a terrifying rollercoaster with damage so great no one could stay invested. You choose your perspective.

The true lesson of 1987 for effective investors: avoid stampedes in the market. Go placidly amid the noise and haste. That you are able to do this is why we believe you are the best clients in the whole world. Email us or call if you would like to discuss your situation in more detail.

1S&P Dow Jones Indices, http://us.spindices.com/indices/equity/sp-500


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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

The Power of Patience

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One of the basic principles of investing is that the longer your time horizon, the greater the yield you can generally expect. On certificates of deposit at the bank, you get higher interest on longer maturities. If you are buying US Treasury bonds, the 10 year bond usually has a higher yield than the 1 year bond. Conversely, if you are taking out a loan, you pay higher interest on a 30 year loan than on a 10 year loan.

If you’ve got a long time horizon, this seems like an easy way to maximize your returns. But there is no such thing as a free lunch—the only reason issuers will pay you more for a longer time to maturity is because they are hoping to get something out of it.

Some individuals may have short term outlooks, and be easily spooked out of the market. That’s bad news for investment companies and debt issuers who find their money reserves drying up when investors start cashing out. If investors lock into longer terms the companies are free to implement longer term strategies with less of a worry about investors abruptly pulling the rug out from under them. That is why they are willing to pay higher yields to keep the money in for longer.

It sounds like a win/win situation, but there are risks to buying longer term investments. A lot can happen in thirty years! Maybe the investment landscape changes and what looked like great returns at the time turns into chump change when newer investments start yielding more. Maybe the issuer runs into trouble, raising questions about the security of the investment. If you were holding a shorter term instrument, you might have avoided those problems.

The good news is that you, too, can benefit from a longer term perspective—without needing to lock your money away in illiquid long-term investments. If you are not jumping in and out of investments in response to short term swings you can cut down the drag on your portfolio and potentially enjoy better returns. Even better, you can specifically seek out more volatile investments that are less popular with investors and may command higher returns than more stable, popular investments. By investing for the long haul, you may enjoy the higher returns that may be available on long-term money.

And, because you did not actually have to lock in your investments for decades, you are still able to react to major upheavals. You can ride through the small bumps without hurting yourself by selling out low and still be able to pull out if you need to.

Of course, staying the course may be easier said than done. Tolerating volatility has been a path to higher returns in the past, but not everyone is capable of doing that. We believe there is an advantage to investing for the long term. But one may retain liquidity—the freedom to change tactics—instead of committing to a course for years or decades to come. Clients, if you want to talk about your time horizon, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Investing involves risks including possible loss of principal.

The AMZN Power of Long Time Horizons

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Jeffrey Bezos founded the online retailer Amazon. He built it into one of the most revolutionary and valuable businesses on the planet. We are not here to discuss Amazon as an investment, but there is a key lesson for our clients in his explanation of this success:

“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns.

The ‘time horizons’ framework has interesting theoretical corollaries. It seems to us that investor time horizons, and tolerance for volatility, are smaller now than ever before. (This is an opinion based on anecdotal observation, not a fact.) But if this is the case, the competition for long term results is lighter than before.

Another aspect is that if the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may also prove to be high since fewer are willing to do it. Again, this is based on our opinion, no guarantees!

By the same logic, we generally believe that investing in far-sighted companies rather than short-sighted companies makes sense. This is not to say that we are interested in pursuing every visionary out there—we know from experience that it is entirely possible to pay too much for a vision of the future, even if it does come to pass. But we are interested in long term results and prefer to invest in companies that share our time horizon.

Clients, we are grateful for you. As a group, you tend to understand living with volatility, and staying focused on the long term. We believe this has been good for you—and for us. Call or email if you would like to discuss your situation in more detail.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.

A Drop or a Loss?

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Recently a client informed us that another person told her that her primary investment account may be invested too aggressively. We asked what the basis was for that conclusion. The explanation: “If the market corrects, I would lose money.”

Anyone who has followed us for any length of time could probably spot the two questionable ideas contained in those eight words. It is worth discussing, because, in our opinion, getting these ideas right may help our clients build wealth more effectively.

1. There is no “if” about the next market correction, it should be when the market corrects. Why act as if we could avoid corrections when we know they will happen and they cannot be reliably predicted nor traded?

2. Is a drop in the market a loss?

We have many long term clients who have lived through dozens of 3-5-7% drops, a fair number of 10-20% declines known as ‘corrections,’ and three or four bear markets with drops of more than 20% in the major market averages. Yet they are sitting on cumulative gains—account balances in excess of the net amount they invested. One might reasonably ask, “what losses?”

The key to our plan, of course, is remaining on course even in difficult conditions, which we know will happen from time to time. We described our efforts to build a client group with this characteristic in our article Niche Market of the Mind.

It is worth mentioning that much of the conventional wisdom about investing assumes that, indeed, a drop in the market is a loss. Furthermore, since many people behave ineffectively when it comes to investing, the conventional wisdom seems to be that everybody behaves ineffectively—doing the wrong thing at the wrong time, again and again—as if it is inevitable for everyone.

It is almost as if statistics about the average weight and exercise habits of Americans are taken as proof that no group of relatively fit people show up at the gym at 6 AM to work out.

We are grateful to be working with you, a group of clients who are disciplined and fit when it comes to effective wealth-building behavior. If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Two Ideas About Time

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Two ideas about time affect our plans and planning when it comes to investing. There is conflict between these ideas, so we need to examine them more closely.

The concept of compounding wealth over time is alluring and powerful. Something that doubles every eight years would be sixteen times the money in thirty-two years!

What does thirty-two years mean in the context of planning for a lifetime? It is the distance between age 30 and when people begin to retire. Of two people at age 60, one of them might reasonably expect to be alive thirty-two years later. You may think that thirty-two years sounds like a very, very long time. But 62 year olds will tell you that age 30 seems like yesterday. Thirty-two years clearly is a pertinent time frame for life planning.

This is key because long time horizons are generally tied to long term investment results.

The other idea about time rests in one of the ultimate truths of our existence. We may think about the past, or plan for the future, but where we live each second is RIGHT HERE, RIGHT NOW! The survival of the human species in earlier ages probably required us to be vigilant of potential threats and lurking dangers at all times. There was nothing to be gained by thinking about tomorrow if a lion was going to eat you today.

So human nature has a bias toward focusing on the present. This manifests itself in unhelpful ways in modern society. We tend to think that current trends or conditions will persist—even when they are unsustainable. Some of us seem to believe there will always be time later to take care of longer-term priorities or goals. We have trouble picturing future changes.

The focus on the present also may explain why so many lack the context and background that history can provide. We have heard people say “This has never happened before” about many things that are a recurring feature of our history. By not understanding challenges overcome in the past, today’s problems may trigger an unwarranted sense of danger.

The focus on the present is in conflict with the idea of compounding wealth over time. Our role is to try to make sure that people have what they need for the present, have a cushion for emergencies, and keep a long term focus for their long term investments.

In other words, balance is key. Call or write if you would like to talk about the balance in your plans and planning.


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

The Beauty of Simplicity

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The high priests of investing preach in a strange language, filled with jargon and confusing acronyms. But some of the people who have actually made the most money investing speak in plain language. Nearly anyone can understand Warren Buffett and Charlie Munger, for instance.

In a recent Wall Street Journal interview, Munger said “There isn’t one novel thought in all of how Berkshire is run. It’s all about… exploiting unrecognized simplicities.” This elegant idea may be at the heart of the difference between effective investors and those who try to play one in real life, the high priests.

Simple ideas have been central to things that have been good for us. Before we cite examples with which you may be familiar, it is only fair to note that there is a yawning gap between “simple” and “easy.” What we do—what you put up with—is not easy.

Historically, the stock market has tended to gradually rise over time. Simple. But what would they talk about all day on CNBC if they didn’t act like the next sneeze or burp from the Federal Reserve (or whatever) would either doom us or make us rich?

Buy low, sell high. Simple. Many if not most investors end up doing the opposite, following trends, jumping on bandwagons, joining stampedes. We know how doing the opposite works out, buying at high prices and selling at low prices. Not pretty.

Own the orchard for the fruit crop. Simple. Yet only rarely does one hear this wisdom from the high priests. They talk about volatility as if it were risk, when the truth is, if the fruit crop is big enough for you to live on, you do not have to worry what your neighbor would pay for the orchard, or if his offer is higher or lower than the day before.

We’ve always believed that what we do is simple. Sure, there are a lot of fine points and nuances. We invest a lot of time and resources to find and learn the pertinent information. But in the end, we ought to be able to explain it to you. This is our goal. If we have missed, or you would like help interpreting something else you do not yet understand, call or write.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.