A look at how investment wisdom over the ages fits today.
I’ve long held the belief that it is good to learn from other people’s experiences as well your own. This remains true especially in investing and personal finance. So far this year, 2020 has been a wild roller coaster ride. And we still have an upcoming election that may face result challenges much more contentious than Bush v. Gore in 2000. As markets swing from high to low and back again while the nation’s GDP set a new record for quarterly decline, we have observed some of the nation’s lowest unemployment recorded only to be replaced by a rapid and extreme rise in unemployment followed by record setting new jobs. All in just a few months.
The details of the unique circumstances are different. But are the fundamental principles of investing and personal finance different? I say no. Let’s look at time tested quotes from legendary investors compared to today’s market. Fear and greed are the two emotions that control the market. Investors are often tempted to sell after the market decline only to buy when they feel better about the market’s upswing. Don’t let emotions dictate actions.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” ― Benjamin Graham1
Benjamin Graham is regarded as the father of modern financial analysis2 and author of several books including The Intelligent Investor. He was educated at Columbia University where he joined the faculty at age 20. But needing to support his widowed mother and his siblings he took a job on Wall Street.
”The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale. – Benjamin Graham3
Both of these Graham quotes are more detailed explanations of the old adage “buy low, sell high,” a fundamental for the value investor. It sounds like common sense that anyone would follow, but phrases like irrational exuberance and momentum stocks have been all too common in our investment lexicon. Chasing stocks that have already gone up flatly goes against Graham’s wisdom even if the public thinks they will go up forever. Buy value.
“No matter how calm you are, no matter how long term an investor you are, no matter what your horizons, when the market is jumping around, you feel uncertainty in your gut and it’s hard to resist that.” – Peter Bernstein4
It appears Bernstein foretold the first half of 2020. The uncertainty of volatile markets can be unnerving. It is wise for an investor to know his or own risk tolerance and invest accordingly. Peter Bernstein was an economist, professor, author and financial historian. He taught at Williams College but later took over his father’s wealth management firm, Bernstein McCauley. He wrote extensively on risk. There are many types of risk which one must manage; market risk, inflation risk, opportunity risk, interest rate risk. The uncertainty that you and many have felt in your gut this year is hard to resist. Have confidence in your plan.
“Many a little makes a mickle. Beware of little expenses; A small leak will sink a great ship.” – Benjamin Franklin5
Franklin is well known for his sage advice. This quote comes from his book “Franklin’s Way to Wealth.” He was writing about keeping expenses under control as it is human nature to want finer things the more money that we make. A mickle means a large amount. He writes the importance of not letting small expenses creep up and steal your wealth. Human nature hasn’t changed. We think a small purchase here or there won’t matter. We may even have become worse as we more readily buy on credit than in Franklin’s time. The extra features on that new car or the most up to date home entertainment system charged to credit may seem like a reward for your hard work. But, be cautious that the finance charges and payments don’t steal your future wealth.
“The four most dangerous words in investing are ‘this time it’s different.’” Sir John Templeton6
No, it is not. Buy on pessimism, sell on euphoria. Templeton grew up in Tennessee with a modest lifestyle. After accomplishments at Yale he created the Templeton Growth Fund. In 1999 Money magazine said of him “arguably the greatest global stock picker of the century.”
Sir John elaborated on his quote above that it is not different this or any other time recommending to buy value when people are willing to sell you what they own for less than it is worth and sell to them when they are willing to pay more than what your stock is worth. He was a long term value investor who believed the only reason to sell an investment was to free up money to buy something else even more attractive.
The market’s current condition has its own unique specifics but the basics are not different this time. Look for your “best time to buy is when there is blood in the streets, even if that blood is your own.” This contrarian view made Baron Rothschild even more wealthy in the chaos after the Battle of Waterloo.
I’ll close with another Sir John Templeton quote. “Self-improvement comes mainly from trying to help others.”7 email@example.com
1,3 The Intelligent Investor – Revised Edition ©1973 Benjamin Graham, new material ©2003 Jason Zweig
2 Columbia University, C250 Celebrates, c250.columbia.edu
4 Capital Ideas: The Improbable Origins of Modern Wall Street, ©1992 Peter Bernstein, Free Press
5 Franklin’s Way to Wealth, Benjamin Franklin
6,7 The Templeton Plan ©1997 Sir John Templeton, Templeton Press
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