“The stock market is a device to transfer money from the impatient to the patient.”
Will I be okay?
This is a question I’m asked all the time, and I wonder if it might echo your own thoughts.
I'd be surprised if it didn’t, because in 30+ years I’ve yet to meet an investor who's not concerned — myself included — regardless of whether the portfolio in question is worth a modest $100,000 or even as much as $20 million.
By way of an answer let me share with you the beliefs I share with my staff, my clients, my prospective clients and even my family and friends:
What's Alan's advice
There's no magic bullet. There’s no quick and easy road to riches, although every once in a while luck favours us — but it is important to remember that luck is random and can’t be counted on. Nor is it a replacement for skill and thoughtful advice.
It takes knowledge, understanding, strict discipline, good judgement and a long-term view to be successful. It takes some soul-searching — critical information you then have to share with your advisor:
What’s your tolerance for risk, for example? What are your goals — what kind of life do you want to lead? Have you planned for your next stage? Have you planned for your family’s future? What’s your time horizon?
These are some of the answers that will help us determine the ‘mix’ of assets you should hold in your portfolio. Remember that saying: “Don’t put all your eggs in one basket?” Well, the same goes for your investment portfolio; and you have lots of choice.
What's the smart thing to do
Diversify. Invest in different types of companies and industries and countries. Invest in different asset classes, not just stocks. Build a portfolio, in other words, that limits the effects of dramatic market swings. Increase your likelihood of being able to get through the tough times and enjoy the payoff from smart investments.
I also tell my clients that in addition to making 'smart investments' successful investors also have a 'smart investment strategy'. What I'm talking about is the philosophy of 'value investing'; and, quite frankly, it's how Benjamin Graham (considered by many to be the father of value investing), and his student, Warren Buffett, have made — and kept — their fortunes.
- Determine what an investment is worth
- Buy it for a lot less
- Keep it until the price goes up, regardless of how long it might take, and then sell at a profit and …
- Last, but certainly not least, if real estate is all about location, location, location (and it is), then value investing (and successful investing in general) is all about managing risk, managing risk, managing risk.
And to that I would add, be choosy about the companies you invest in. Ensure they are successful businesses from all over the world, that:
- Have competent and honourable management
- Don’t squander money on trophy corporate headquarters
- Think like owners because they are owners
- Maintain companies that have little or no debt, and …
- Finally and crucially, do not consciously overpay for the shares of those businesses.
How is this different from speculating?
What I’ve just described is contrary to the philosophy of speculators, who think primarily about ‘maximizing returns’; and, therefore, believe they can beat the market — and, to be fair, sometimes they do, but just not often enough.
Essentially a value investor is a very patient, very savvy shopper — one who steadfastly refuses to overpay, regardless of what others are doing — much preferring to zig when everyone else zags. True bargain hunters who look for high quality at low prices. As Warren Buffett says: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
Add to this the power of compounding and you, too, can be successful. This brings to mind another of my favourite Buffett quotes:
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” What he’s saying is, instead of looking for investments that are going to double in a year or two, look for those that are going to go up a more reasonable amount every year for the next 20 years or so.
Here's a very good example
If you’re sitting there thinking, “Yes, but I’m no Warren Buffett — that will never happen to me — the average investor would never see results like that” let me introduce you to a woman few people had ever heard of until she passed away.
Orphaned at twelve, Grace Groner was cared for by neighbours, went to college, never married and worked at Abbott Laboratories in Chicago as a secretary for 43 years. When she died in 2010 at 100 she left a $7 million dollar estate! How’d she do it?
In 1935 she bought three shares of Abbott stock for $60 each. She reinvested the dividends and never sold them. Over the next seventy-five years her three shares multiplied to well over 100,000 and her initial $180 investment grew 38,000-fold to approximately $7 million. Enough said.
The magic of compounding: start early
Allan, Jean and Peter invested a sum of $500 regularly each month in an investment vehicle that returned 8% annually. However, each of them started saving at different points in time for their retirement. The cost of delaying your savings plan cost you thousands of dollars.
*The rate shown is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
What if that doesn't always happen?
Let’s not forget another key characteristic that sets value investors apart: First and foremost, we want to preserve our capital. We look for a ‘margin of safety’ — to allow for the unexpected, human error and plain bad luck.
Imagine you were building a bridge. Would you build it to handle exactly 100 tons? I don’t think so. It would be much safer to make sure it wouldn’t collapse under a really heavy load — say 130 tons.
Portfolio management is the same. To quote Warren Buffett again, “The first rule of investing is don't lose money," and the second rule is, "Never forget the first rule."
What's Alan's philosophy?
I, too, believe trying to avoid loss should be your first priority. But that doesn’t mean you should avoid all risk. On the contrary, gain is rarely accomplished without taking some risks. What you need to understand is which risks are worth taking and which aren’t.
Unlike speculators, who delight in predicting the ups and downs of the market, we seek out investments that seem to offer an attractive return for the amount of risk involved. Our view is similar to Mark Twain’s: “There are two times in a man’s life when he should not speculate: When he can’t afford it and when he can.”
Who really knows what the future will bring? What’s important is how successfully we deal with the ramifications of being wrong. To quote from Benjamin Graham’s book, The Intelligent Investor, “The essence of investment management is the management of risks, not the management of returns.”
Or, in much the same way as with hockey, “it’s all about defense.” Championships are won with great goaltending. So in my opinion, this can’t be stressed enough.
Is there a secret to managing risk?
It’s been said many times before. None of us have a crystal ball and, therefore, none of us have all the answers. But we can and should be strategic. Take, for example, the ongoing debate between active and passive fund management. The truth is, everything works, but not all the time. So our belief is, to have the highest probability of success over the time term, value investors can hold both.
We can and should make informed decisions. We can and should practice self-control and summon up the patience and fortitude to wait for the right time — to buy and sell.
We can and should be prudent, taking care not to pay more for an investment than it’s worth. We can and should diversify enough to compensate for volatility. We can and should recognize that when a risky bet on an improbable outcome has a positive result, it happened because of luck and boldness — not ability. Which is one very good reason why we can and should trust and respect the value and importance of good advice.
Don’t confuse entertainment with advice:
The television, print, and online financial media area in the business of entertainment. The emphasis is often on short-term, sensational, and emotionally charged headlines. These messages can compromise long-term focus and discipline, and lead too poor investment decisions.
Interestingly enough, not all risks are about the act of investing. Alan Lakein, a well-known author has been known to say: “Failing to plan is planning to fail.” While he is talking about personal time management he could very easily be referring to investing.
Like I mentioned earlier, without a road map, or a plan, how can we possibly succeed? Without a plan that you are committed to, that you’ll stick with and that you review regularly with your advisor, how can the two of you possibly know whether or not you’re on track and what adjustments you might have to make — to your investment strategy, to your goals, or both?
What the power of partnership can do for you?
You have to be involved. You and your advisor should be partners ... a team ... a team with one, common purpose. Only you know, for instance, what you’re saving for ... what your time frame is ... what you’re comfortable with ... what your financial and psychological needs are, what your obligations are now and what they will be in the future, what you can afford to put away now and the lifestyle you want once you’re retired.
Which leads us to why I’m here: Among many other things, I’m here to ask you the right questions. The questions that give me the insightful and meaningful answers I need to help you build a portfolio that will stand the test of time. A portfolio that will do well in situations we consider likely, limit your risk, preserve your capital and keep your future safe — to successfully manage the margin for error by insisting on defensive investing.
In other words, I’m here to give you thoughtful advice.
We hope that once you have spent some time going through our website you trust that we have a keen understanding of the investment industry, value investing and the individual needs of investors — regardless of whether or not you are currently a client. If you’d like to get in touch you can call me directly at 416 594-5500 or email.