In today’s era of 24/7 media bombardment, it can be easy to become overwhelmed by all the “expert” opinions out there. This is particularly true as we embark on a new year and stock market prognosticators and soothsayers compete to be the next sound bite.
Similarly, you can bet that, whenever the stock market hits a rough patch, the talking heads will spew gasoline onto the fire. In times like these, I suggest you turn off Jim Cramer and CNBC and quietly contemplate the sage and timeless advice contained in Davis Advisors’ updated “The Wisdom of Great Investors—Insights from Some of History’s Greatest Investment Minds,” which can be found at www.davisfunds.com.
If you can follow these seven points, you’ll be way ahead of most investors:
1. Avoid self-destructive investor behavior. Unfortunately, the natural tendency of most investors to buy when things look sunny and sell when gloom is prevalent is deadly to building long-term wealth. Over the period from 1992-2011, the average stock fund had an annual return of 8.2 percent, but the average stock fund investor earned only 3.5 percent.
Left untouched, $1,000 invested in the average stock fund on Jan. 1, 1992, would have grown to $4,836.66 by Dec. 31, 2011. Unfortunately, buying high and selling low left the average stock fund investor with $1,989.79—less than half what the buy-and-hold investor had.
2. Understand that crises are inevitable. Crises are painful and difficult obstacles every long-term investor has to overcome. The 1980s brought us the Crash of 1987, the 1990s the S&L crisis, and the early 2000s the technology bust. We’ve faced the global recession/financial market meltdown and European debt crisis. Today’s crisis is the “fiscal cliff.” Tomorrow’s crisis will be a different calamity.
3. Historically, periods of low returns for stocks have been followed by periods of higher returns. Painful periods often cause investors to abandon stocks at precisely the wrong moment. From 1928-2011, there were 13 10-year periods where stocks returned less than 5 percent. Past performance is no guarantee, but each of these was followed by a satisfactory 10-year period, averaging 13 percent per year.
4. Don’t attempt to time the market. It’s a loser’s game. Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections than has been lost in the corrections themselves.”
5. Don’t let emotions guide your investment decisions. Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”
6. Understand that short-term underperformance is inevitable. Almost all superior investment managers go through periods of underperformance. For managers ranked in the top 25 percent for the 10-year period ending Dec. 31, 2011, 96 percent had one three-year period that placed them in the bottom half, 68 percent had one period in the bottom quartile, and 35 percent had one period in the bottom 10 percent.
7. Disregard short-term forecasts and predictions. Don’t make decisions based on variables that are impossible to predict or control. As economist John Kenneth Galbraith said, “The function of economic forecasting is to make astrology look respectable.”•
Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or firstname.lastname@example.org.