The Informed Investor

Recently we have had a number of people with bad investment experiences contact us for advice.  So what do we tell people who want to become informed investors, who can have a successful investment experience?

We begin by saying, that most people still don’t understand the difference between speculation and investing. When you’ve got this kind of volatility, this weakness in the market, speculators are the ones that hurt the most. Investors who are focused on that five-, ten-, twenty-year time horizon are more educated about their outlook.

Well, many people walking in the door don’t know the difference. Most of them may have believed that they were investors when, in fact, they were behaving or being led to behave as speculators.

Now, a couple of things on the market itself. When people ask about the market-one of the things I point out is that for every seller in this market, there’s a buyer. Now, the way the media reports this frequently, you would only think there are sellers, which obviously can’t be. That means that for every person who sells because they don’t like the prospects for the future, there’s someone you might call an “optimist.” There’s someone who’s buying who thinks they’re making the investment at a great price. Those two groups of people or investors or participants in the market have to be in equilibrium at all times. If you were taking a poll every day, the poll is 50/50 whether the market is headed up or headed down, or whether the future looks bright or the future looks dim.

When you put it in that perspective, you don’t get this overwhelming sense of doom that the media wants to create for people that there’s only one way to go and that is down. If that’s the case, there’s a lot foolish people buying at this point in time; and I’m not going to believe that, because we all know that the economic forecast, the consensus of the future, is reflected in today’s price. It simply has to be that way. It can’t be any other way.

My advice, if you have long-term perspective, don’t sit on the sidelines

If you go back to the 1973-1974 market, which was similar to this in terms of being down approximately 40%-if you had invested at the beginning of 1975 (I mean, great market timing), over the next five years you would have averaged 28.7%. If you had waited one year, waiting for things to be more clear, the return drops to 24.8%. Now, that’s leaving a lot of money on the table, hence the cost of waiting. I’m looking at a 100% equity, globally diversified portfolio. If you go to 1990 when the market was down 16% worldwide, if you invested at the beginning of 1991, your five-year return was 19.1%; if you waited one year, 16.9%. Then, of course, we come back to 2003. I don’t have the five-year number for waiting a year; but if you invested at the beginning of 2003, your return was 21%. If you waited a year, over the next four years it was 14.7%.

With the incredible ‘flight to safety’ – to cash – over the past 12 months, there is now a stockpile of money sitting on the sidelines. Maybe these are the people who are waiting for things to become clearer. The idea that there are no potential buyers out there is just not the case.