Sunday, June 7, 2015

Common Sense Investing for the Long Haul Should Be Both Easy and Extremely Successful ... Start Early, Buy Shares of Solid Companies and Stay the Course

Warren Buffett has a unique track record as a tremendously successful long term investor. His methodology has followed the common sense based way. In so doing, he's paved the way for the rest of us mere mortals.

The 'secret' lies in knowing, internalizing and adhering to the 'rule of 72' which reveals a simple mathematical reality --- money will double each time (1) the combination of years invested multiplied by (2) the average annual percentage rate of return (3) equal 72. It's as simple as 1-2-3.

By following this rule of 72 (4x18, 18x4, 6x12, 12x6, 8x9 and 9x8, as examples), and investing in a diversified portfolio of solid companies for the long haul, the results can be astonishing. This boring and unsophisticated method isn't sexy, but it is successful

My only argument with the following rules of the road attributed to Mr. Buffett is the one about diversification. The plain fact is that for those with a long term perspective and the emotional intelligence to stay the course when the 'fit hits the shan' from time to time, which it inevitably has done and will continue to do in the future, stocks for the long haul are the very best investment of choice.

The risk reward factor always favors stocks compared to fixed income, real estate, gold and other assets. And as interest rates are now at historically low levels, fixed income investments won't prove to be good investments for the foreseeable future, assuming we want our investments to earn more than the rate of inflation, which we do. Even target fund investors should beware.

Five Bedrock Principles for Investors is subtitled ' Brilliance isn't the only key to Warren Buffett's investing success. See rule No. 5:'

"The U.S. economy shrank last quarter. The Federal Reserve is widely expected to begin raising interest rates later this year. U.S. stocks are expensive by many measures. Greece’s national finances remain fragile. Oh, and election season already is under way in the U.S.

Investors who are tempted to sell risky assets and flee to safety don’t have to look far for justification.

If you are one of them, ponder this: Most of what matters in investing involves bedrock principles, not current events.

Here are five principles every investor should keep in mind:

1. Diversification is how you limit the risk of losses in an uncertain world.

If, 30 years ago, a visitor from the future had said that the Soviet Union had collapsed, Japan’s stock market had stagnated for a quarter century, China had become a superpower and North Dakota had helped turn the U.S. into a fast-growing source of crude oil, few would have believed it.

The next 30 years will be just as surprising.

Diversification among different assets can be frustrating. It requires, at every point in time, owning some unpopular assets. . . .

2. You are your own worst enemy.

The biggest risk investors face isn’t a recession, a bear market, the Federal Reserve or their least favorite political party.

It is their own emotions and biases, and the destructive behaviors they cause.

You can be the best stock picker in the world, capable of finding tomorrow’s winning businesses before anyone else. But if you panic and sell during the next bear market, none of it will matter.

You can be armed with an M.B.A. and have 40 years before retirement to let your savings compound into a fortune. But if you have a gambling mentality and you day-trade penny stocks, your outlook seems dismal.

You can be a mathematical genius, building the most sophisticated stock-market forecasting models. But if you don’t understand the limits of your intelligence, you are on your way to disaster.

There aren’t many iron rules of investing, but one of them is that no amount of brain power can compensate for behavioral errors. Figure out what mistakes you are prone to make and embrace strategies that limit the risk.

3. There is a price to pay.

The stock market has historically offered stellar long-term returns, far better than cash or bonds.
But there is a cost. The price of admission to earn high long-term returns in stocks is a ceaseless torrent of unpredictable outcomes, senseless volatility and unexpected downturns.

If you can stick with your investments through the rough spots, you don’t actually pay this bill; it is a mental surcharge. But it is very real. Not everyone is willing to pay it, which is why there is opportunity for those who are.

There is an understandable desire to forecast what the market will do in the short run. But the reason stocks offer superior long-term returns is precisely because we can’t forecast what they will do in the short run.

4. When in doubt, choose the investment with the lowest fee.

As a group, investors’ profits always will equal the overall market’s returns minus all fees and expenses.

Below-average fees, therefore, offer one of your best shots at earning above-average results.

A talented fund manager can be worth a higher fee, mind you. But enduring outperformance is one of the most elusive investing skills.

According to Vanguard Group, which has championed low-cost investing products, more than 80% of actively managed U.S. stock funds underperformed a low-cost index fund in the 10 years through December. It is far more common for a fund manager to charge excess fees than to deliver excess performance.

There are no promises in investing. The best you can do is put the odds in your favor. And the evidence is overwhelming: The lower the costs, the more the odds tip in your favor.

5. Time is the most powerful force in investing.

Eighty-four year old Warren Buffett’s current net worth is around $73 billion, nearly all of which is in Berkshire Hathaway stock. Berkshire’s stock has risen 24-fold since 1990.

Do the math, and some $70 billion of Mr. Buffett’s $73 billion fortune was accumulated around or after his 60th birthday.

Mr. Buffett is, of course, a phenomenal investor whose talents few will replicate. But the real key to his wealth is that he has been a phenomenal investor for two-thirds of a century.

Wealth grows exponentially—a little at first, then slightly more, and then in a hurry for those who stick around the longest.

That lesson—that time, patience and endurance pay off—is something us mortals can learn from, particularly younger workers just starting to save for retirement."

Summing Up

There you have it.

Simple rules for long term successful investing.

For long term investors, it's that last double (or two) that will determine an individual's investing success over the years.

So starting early and staying the course is essential.

In the end, our emotional side will prove to be as, or perhaps even more, important than our rational side.

That's my take.

Thanks. Bob.

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