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“Now we wait.”
“What?” The client asked.
“We wait. We collect dividends, and we let our investments grow.”
“But we have a new [former actor] president, interest rates are high, unemployment is rising, the dollar is getting crushed and inflation is out of control!”
“We wait.”
Years ago I remember having a conversation similar to the one above with a client. It was the last time I said, “Now we wait,” regarding investing, because he interpreted that statement as, “Buy ’em and forget ’em.” Nothing is further from the truth. At FIM Group we constantly monitor each holding, the macro environment, industries, government policies, each company’s products, services, strategy and competition. This is part of our normal business scanning. And we don’t worry when the price action goes against us. Not only do we not worry, but on the contrary, having done our research to give us deep conviction, we savor those opportunities to buy more of what has more value. As Barry Hyman points out in his article (see page 4), buying at the right(bargain) price is key.
In past issues of our newsletter, I have discussed “behavioral” investing, a topic in which I have been a believer long before economists and financial gurus considered it a science. Back then, we labeled it “mania behavior” or “emotional investing.” In the past I have also discussed the “dark horsemen” of investing: Recency effect (placing more weight on recent history than on the entire history); endowment behavior (our predisposition to hold onto our investments); heretics (misplaced inferences based on random events or experiences); and other perils of investing. Investors often want to trade companies – not based on their investments or worth, but rather on their price action. Thankfully Wall Street brokers readily oblige this desire, because trades result in new commissions after all.
“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
– Benjamin Graham
Sadly, though, this behavior is at epidemic proportions, even for the wealthiest of investors. The June 10, 2011, issue of The Financial Times had an article titled “Self Control Is the Key to an Investor’s Life.” The author drew on a Barclays Wealth study of 2,000 wealthy investors ($2,500,000+ in investments) and found that many (40%) tried to “time” the market by selling and buying often. One-third felt they needed to buy and sell often to be successful. On the other extreme, two-thirds of the respondents said that they have bought illiquid investments (e.g., real estate, annuities, partnerships) so they did not have to make a “buy or sell” decision. 76% resorted to avoidance strategies such as avoiding the news, or not looking at their investment statements. I inferred from the article that the 2,000 investors surveyed had poor results.
Art of War
Does it take courage to invest? I wonder if it is skill or just plain common sense that guides the successful investor toward good, consistent returns. I think the following statement from the ancient Chinese military treatise Art of War sums up the point and compels me to replace “courage” with “seasoned expert”:
“Thus the expert in battle moves the enemy [emotions, in the case of investing] and is not moved by him [his own emotions].” – Sun Tzu
My 20-year-old daughter is a dive master, and I have been scuba diving for nearly 30 years. Over Christmas break we went on a cave dive. On the plane ride home, a woman overheard us talking about the dive and said, “Gosh, I could never muster up the courage [to dive in a scary, dark, water-filled cave].” My daughter and I looked at each other, and she turned to the woman and said something to the effect of, “When diving, you’re safe because you’re trained. You also have a dive buddy who’s both a dive master and an expert on the cave. You follow a rope to prevent getting lost, and when you have two-thirds of your air left in your tank, you head back to the surface where someone is waiting.” My daughter and I have done more than 100 dives each, and we don’t dive if the conditions aren’t right or we sense any danger.
“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” – Benjamin Graham
We Will Be Patient With Our Holdings and Wait
There are more than 50,000 stocks, there are millions of bonds and there are tens of millions of other investments such as real estate, commodities, gold, etc. Some of these investments are worthless, and some are gems. Some are “safer” than others at different times, depending on the prevalent business, economic currents, investing climate and, of course, the ever-present emotionally charged investor psychology.
As Barry points out in his article, there are many great investments that have great characteristics – very compelling attributes as investments – but alas they are sitting on the “bargain table.” Thankfully, everything is cyclical, and eventually investors will be attracted into good, solid investments like those Barry highlights. Their prices will go up, and we will sell them when they get to a price that is too high based on a price-to-value analysis. In the meantime, we will collect our income and dividends, let management do “their thing” and we will, with diligence and strategic patience … wait.
