Readers: Please note that due to Hurricane Irma and a resulting loss of power, home and office, this is a repeat of a favorite column.
The following words are beginning to sound like a broken record but based on emails and phone calls, it seems many investors have forgotten that the financial markets can and do move erratically, unpredictably and chaotically.
The past several weeks have served as a nasty reminder that investing is not an express elevator ride to the top floor. However, as you peer into the black abyss of what lies ahead, please keep in mind two key principles.
The first is that the performance of individual securities is uncertain and secondly that the performance of a portfolio of securities is uncertain in the short-term.
Although no amount of prose can counter the emotions resulting from a loquacious pundit discussing a day’s tumultuous trading activity on Wall Street, I would like you to once again consider the wise words of Lucien O. Hooper, a Wall Street legend.
“What always impresses me,” he wrote, “is that the relaxed investor is usually better informed and more understanding of essential values; he is patient, less emotional and avoids behaving like Cassius (brother-in-law to Brutus and a key assassin of Caesar) by ‘thinking too much’.”
Being relaxed should not be confused with being complacent. You need to monitor your investments on a quarterly basis. Expect and react to change. No market is static and there is no investment you can purchase and then forget about.
Yet, investors’ attention is too often shifted away from their main objective; the search for underpriced quality stocks. Instead they focus on questionable opinions from so-called experts over what might or might not happen … and when.
Of course, it is an arduous task to buy when everyone else is selling or has sold. It takes superhuman resolve to invest when things look grim, to buy when many so-called experts are telling you that the investment outlook is uncertain at best.
However, if you purchase the same securities as everyone else then you will have the same results as everyone else. And chances are if you buy what everyone else is buying, you will do so only after it is already overpriced. Furthermore, you cannot outperform the market by buying the market, i.e., a market index.
Heed the words of Benjamin Graham. “Buy when most people are pessimistic, and sell when they are actively optimistic.” Bernard Baruch, adviser to presidents, was even more succinct when he said, “Never follow the crowd.”
Many investors live in fear of an investment not working out. Consider the following example. Invest $20,000 in each of five investments for 20 years. Assume the first investment is totally lost, the second investment returns only the original $20,000 investment, the third investment returns 5 percent, the fourth 10 percent, and you hit a home run and receive 15 percent on the fifth $20,000 investment for an average of 6 percent.
If you do the math, you will find that after the 20 years, you will have a total of $534,946 for a compounded annual rate of return of 8.75 percent. However, if instead of splitting the $100,000 up into five parts, assume you could invest the entire amount in a $100,000 certificate of deposit paying 6 percent. What would you have at the end of 20 years? The answer is $320,713.
The key is not the 20 years but rather that not every investment has to work out. Diversification can overcome adversity if you remain flexible and open-minded. No investment is always best and popularity in the investment world is temporary at best.
Wall Street’s world is fragile, and depends extensively on time and chance. So invest with intelligence, engage in solicitous but sensible discourse when considering the future, diversify your holdings and finally be skeptical about every prognostication you are given, including mine. Above all, recognize and heed the wisdom of Ecclesiastes’ profound warning:
The race is not always to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all. (Ecclesiastes 9:11)
Lauren Rudd is a financial writer and columnist. You may write to him at Lauren.Rudd@RuddInternational.com.
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