History tells us everything we need to know, but do we always listen?

by Alan Friedman

Intellectually we know that successful investing is all about the long term and what happens day to day, week to week, month to month or year to year will not have an adverse effect on our long term success.

If we make sound, strategic, practical investment decisions, if we ignore the noise, if we stick to our principles and don't panic, get side-tracked by momentary fads or get swayed by others. If, in other words, we're disciplined and let our investments stay the course — assuming you have the right mix for your age.

Having said that, though, it is important to acknowledge that there are concerns currently. The markets are volatile, interest rates are going up, inflation isn't as temporary as we hoped early on, and a recession may indeed be coming. After 12 great investing years, things are changing. And it can be unsettling.

That is all true. But what is also true is that we've weathered these times before and if we learn from history and most successful investors, cool heads prevail.

And we have plenty of role models who prove this theory year in and year out, not the least of whom is one of the world's most successful investors, Warren Buffett who, you may or may not know used all his savings to buy three shares of preferred stock in 1942 and has never looked back (did you know he made most of his money after the age of 65?).

We often have unrealistic expectations and our ensuing anxiety when those expectations aren’t met — which they can’t be — therefore seems almost inevitable. And then there’s Warren Buffett who, in his 2021 Annual Letter to Shareholders, freely admits to “making many mistakes.” 

What Mr. Buffett has clearly learned, which not all of us have, is that the errors and the losses and the downturns and the instability is temporary. It doesn’t last and it doesn’t impact our long term success. So the prudent thing to do is wait it out, bide your time.

But inevitably, with unrealistic expectations comes anxiety. And we just keep going there.

Something else Warren Buffett writes in the shareholder letter — that the Dow closed at 99 that day in 1942 when he used his lifesavings to buy three shares of stock.

In 1942 the Dow closed at 99. At the end of last year it closed at 35,000. As an interesting aside, in 1999 when the syndicated columnist James K. Glassman and the economist Kevin A. Hassett wrote their book “Dow 36,000,” they were laughed at.

I was curious so for fun I decided to see where the Dow was the year I was born, which is 1954. By the end of that year it topped an all-time high of 404.39. 

I kept digging. My eldest daughter was born in 1989 and the Dow was at 2,510.33. When my youngest daughter was born in 2004 the Dow was at 10,315.51. In 2008, the year of the great recession it was 11,244.05, down 33.84% from the year before — which was up 6.43% from the previous year. 

Imagine what your savings would look like if you’d invested in 1954 and left it alone for even 35 years.
 

Alan Friedman is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Alan Friedman do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

@AlanFriedmanWG