Wednesday, April 9, 2008

Your Best Investment Posture? Benign Neglect

Many years ago, probably some time in the 1970s, I read one of those “How I Made a Million in the Market” books that changed the way I look at the stock market, very much for the better. To tell you the truth, the book wasn’t even very good, but its overall premise was compelling. It contained a lesson that is even more important today than it was 30 years ago.

It seems that the author, who had never done very well in the stock market, was a journalist who was sent to Indonesia on assignment for an extended period of time. As a result, he had very limited access to investment information, and could only communicate with his broker by cable on a quarterly basis. This forced him to take a macro, big picture view of economic conditions and, in the end, made him a much better investor, and eventually a millionaire.

For years, my business partner and I have joked about the truth behind this scenario, calling this market posture “benign neglect.” And I believe that this is the important lesson to be learned from this otherwise forgettable book --- Do not get too close to the market!

In the Internet Age, this lesson is more important today than ever. Because sitting right where you are, reading this blog article, you have more investment information available at your fingertips than ANYONE had in the 1970s and 1980s. To even come close to the amount of information available to you would have cost thousands of dollars per month.

Right now, my mind is reeling with stories of times when I tried to take advantage of some news item that was “fresh off the tape.” Not many of them are success stories. But it was not easy to train myself to take the longer term view. And my clients don’t exactly make it easy, especially those who watch CNBC for hours on end. Remember, CNBC has to fill hour after hour of programming every day. Of course they’re going to focus on “what’s moving” and why. And they have to interview the pundits and CEOs as well. The CEO interviews are actually the best, since most companies wisely have a policy that “we don’t comment on the price of our stock.” So they stick to business prospects. But they too have very strong pulls on them to perform "right now," even at the expense of long term growth.

As far as the market pundits go, I have seen many come and go who have tried to predict the ups and downs of the market. Some get lucky for a while (see my article on this, "No One Can Predict the Stock Market ... Including Me), but then the law of averages catches up with them. But there is one man whose track record stands head and shoulders above them all, and who has had the staying power to become, the richest man in the world, at least until he started giving his money away. Of course I’m talking about Warren Buffett, the famous “Oracle of Omaha,” whose investment company, Berkshire Hathaway, has had a most extraordinary long term record.

A $10,000 investment into Berkshire Hathaway when Buffett took control in 1965 would be worth over $50 million today. By comparison, $10,000 in the S&P 500 would have grown to only $500,000. How’s that for a LONG TERM track record? Index fund holders, are you paying attention? Do you think this is a man worth listening to?

So how has he done it? Maybe you can tell from these quotable Warren Buffett quotes. I may elaborate on these at some point, but for today, I’m just going to close with these quotes, which speak for themselves:

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

"If a business does well, the stock eventually follows."

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

"Time is the friend of the wonderful company, the enemy of the mediocre."

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

"We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'"

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

"Our favorite holding period is forever."

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