From December 29, 2010 issue
At the end of past years I have developed a habit of setting myself up for failure. Making predictions about the direction of prices in the financial markets is a hazardous business where guessing right 50 percent of the time is good. But yet, there is an expectation among the majority of investors that individuals who provide investment advice should be able to predict the future, somehow magically providing all the right tips to help them succeed at an above average rate.
I'm a little embarrassed to say that I'm just now reading "The Intelligent Investor," by Benjamin Graham, after being in the investment profession for about 23 years. Graham is not exactly a household name, but if you knew that he taught Warren Buffett at the Columbia University Business School you might pay attention. Buffett credits Graham with being the most important influence in his life after his father. Graham's track record as an investor left his peers envious.
Graham's opinion about the role of an investment advisor was one in which the value of the advisor to the client was in the form of helping the client avoid mistakes, not one in which the advisor generated excessive returns. Of course, avoiding mistakes does potentially help the rate of return become higher.
It has been amazing to me to read Mr. Graham's book written in 1948, fresh with memories of the Great Depression and World War II, and to relate the fear and greed cycle of investor emotions of that period to what we have experienced in the last 10 years. They are the same. The descriptions of the speculative market phase in 1929 could have been used as a great description of the technology stock bubble of 2000 and few would know the difference.
His recommendations for how investors should approach investing is very sound and includes criticism of taking too much risk in an effort to beat the market, short-term trading and viewing investments in equities as speculating as opposed to investing as an owner of the business. Interestingly, he was also a fan of formula based investing, which is the concept of using a set of rules to buy and sell stocks as a way to avoid the emotional mistakes which lead so many to sub-par returns.
So, as we approach a new year, it's my hope that a list of resolutions might be helpful as you consider your investment planning for 2011 and beyond. In the spirit of Benjamin Graham's vision of an advisor – client relationship, I hope they might help you avoid mistakes.
Don't take too much risk
The fund managers with the best track records we know of generally earned them by putting a higher priority on avoiding losses during tough times than generating the largest gains when things were good. Recovering from a 50 percent loss requires a 100 percent gain, and most investors have left the scene of the crime after absorbing a large loss and don't participate in the recoveries.
I would venture to say that for most investors, a plan averaging 6 to 8 percent with lower risk of failure will end up providing a better result than a more aggressive approach.
Don't fall in love with past success
There are exceptions, but every short and medium term trend that has ever existed has caused losses for those who came in too late. Stories from friends about their great success with some investment theme are great influences, but if they've already made a lot of money, isn't it time to consider when that game might end? They all do. Instead, consider what is being viewed in a pessimistic light as the bargains to consider for the winners of the next few years.
Every crisis the U.S. economy has experienced felt like the world would never be the same and our best days were behind us. This has been going on for more than 200 years, but yet our standard of living keeps rising, personal wealth keeps rising, and our lives are longer and healthier than ever before when considering the population at large.
Returns from investment in stocks, bonds, and real estate have been very positive over periods of time that your investment planning horizon should encompass (10 to 20 years). You can always say, "It's different this time," but that has always been a losing bet.
I hope you enjoy a prosperous 2011, and wish you all the best for a happy and healthy new year.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.