This is an archived article written November 21, 2003
Ever Feel Like Andy Rooney?
I was in my office recently writing an article about why and how Americans were missing the boat on international investing. An idea and practice that likely could increase their potential returns and lower their risk. Then I talked with a couple of prospects, got correspondence from another and watched a little bad CNBC. I decided that finishing the international investing article wasn’t as important as reiterating some points that I like to make to folks over and over again– if nothing else to remind myself of the points.
Making money isn’t always about making money. Most of the time it’s about not losing money. And in that vein, it’s about measuring risk versus potential reward. That’s called “risk adjusted returns.” Having a Margin of Safety when selecting investments is imperative to achieving strong risk adjusted returns over time.
Building in enough margin of safety when investing is a lesson that I learned not in the hardest way, but in a hard enough way. During the current bear market– I believe we are in a secular bear market, even if the past couple quarters have been good– I’ve done pretty well by most folks. Bad luck, getting lied to by some companies, folks refusing to listen and my own misjudgments did lead to some losses however. I think I’ve learned from my mistakes and am a lot more focused on investing with a safety net. I hope you can use my experience to do the same.
Now I know that I’m not the best in the world at this whole investing thing. But boy oh boy, I study a lot, and from time to time, I find a gem of a company at the right price. For folks with accounts appropriate for single stock investing, we usually buy stocks in addition to mutual funds. Most importantly though, I work this Asset Allocation thing. That is, I try to find the right mix of asset classes at the right prices for the right accounts.
Keeping track of the general pricing of multiple asset classes isn’t that hard anymore. Computers are pretty neat. Knowing when asset prices are relatively high, low or about right is really tough though. I cheat by reading and listening to a few multi-millionaires (the kind measured in hundreds of millions) and billionaires who have pretty good investment records. You should cheat too, just remember to copy from the smart kids, not some loud flunkie. After I get a bit of direction, I crunch numbers, consider the future and try to find asset classes with more upside than downside. Not the sexiest way to pick investments, but it seems to make sense. BTW (that’s “by the way” for those who don’t use online abbreviations) buying low and selling high, isn’t market timing, it’s smart. And it pays to be super picky and cautious.
We diversify among asset classes so that we don’t have to be perfect or clairvoyant– which we can’t be anyway. Our goal is to create a good fund portfolio by focusing on undervalued asset classes and adding a few undervalued stocks (20 to 30 ultimately, for reasons I won’t go into today) over time for spice, and whoola, money stew– just allow 10 to 20 years to simmer.
So why do I feel a bit like Andy Rooney? Well, I’m concerned that the current round of Wall Street corruption is just going to be a distraction to the smartening up of investors. A few months ago I heard somebody mention their concern over the weakening dollar, whether it could lead to capital flight and depress markets. I heard somebody else wonder how tax policy would affect the economy and certain types of investments. Seemed to me that until the recent stock market uptrend, mutual fund scandals and other Wall Street malfeasance, investors were starting to smarten up. Now I’m not so sure. I know that’s harsh, but it might be true.
I roll my eyes in amazed consternation when I hear a prospect, a guy at the bar (yes, I like beer) or a broker (can you believe that) talk about this or that HOT idea, then hear that they have no idea what that company earns or what some mutual fund is invested in, AND, they never mention prices.
I am also really baffled when folks who don’t trade securities full-time try to pick a good time to get into or out of stocks based on a guess of where the markets or a stock price are going. That IS market timing– and it doesn’t work for about 90% of the folks who try it. Folks, there is only a very small handful of traders who make money– and they do it by taking advantage of those who don’t do it full-time.
I’m bugged that many folks seem emotional (not the people I work for) about getting the best return this quarter or that quarter. I’m bewildered that many people’s lust for a few extra percentage points of gains supercedes their willingness to manage risk– until of course they lose a few dollars. I’m bothered that the media feeds into the Wall Street cult of personality over and over again. I’m perturbed that the middle class seems to be getting squeezed again when they really don’t have to. I’m concerned that so many people are focused only on American markets. I worry that Americans are going to miss the growth of the world economy over the next few decades.
I’m especially bugged when I start to feel like Andy Rooney, like I feel now. So, I’ll stop worrying so much about all this stuff, and make some money in spite, or because of it. Maybe you should do that too.
We’ll talk about those international investments some other time. Hmmmmmm? Maybe we just did.
I hope you read in Andy’s cadence. If not, you might want to read this again.
“Computers make it easier to do a lot of things, but most of the things they make it easier to do don’t need to be done.” Andy Rooney