As Warren Buffet has repeatedly emphasised, trying to time the markets is a mug’s game, and short-term disasters should be of little concern to the long-term investor.
I have had a number of people, including some clients, wonder whether the rises we have seen in the stock market in the UK and internationally are a false dawn.
“Haven’t I read that markets are going to fall?” they say. “Are we really on the road to recovery or is there another major slide around the corner?”
The answer all depends on what branch of alphabet economics you subscribe to; whether you believe the downturn and its subsequent recovery will be V-shaped, W-shaped or any other letter-shaped.
However, in discussing the matter, my response is always the same. If you are investing for the long term, whatever happens in the short term makes little difference. Neither I, nor anyone else, can make a confident prediction as to what the market will do in the next few weeks or months.
However, all sorts of ‘experts’ are prepared to suggest otherwise. To my mind, most appear overly keen to tap into the negative side of people’s psyches. Ask yourself whether these same people said that last March was the bottom of the market and a great time to invest. I expect you know the answer to that question.
It is disturbingly easy to let emotions rule financial decisions, especially as you can now find an expert point of view that matches just about any scenario that you want to worry about.
It is also difficult to take a consistent and constant view to investing when we live in such a changeable environment. However, investors would be wise to remember that, even though reading, listening, and watching financial media can be entertaining, it can also be confusing, if not outright harmful to your long-term financial success.
Perhaps they should instead pay more attention to people like Warren Buffett. Buffett, who never tires of saying that it is a fool’s errand to try to time markets, has pointed out that instead of taking a long view, many investors have had experiences ranging from mediocre to disastrous by looking at markets over the short term.
This, Buffet believes, is the result of three primary causes: first, high costs, usually because investors have traded excessively; second, portfolio decisions based on tips and fads rather than on a thoughtful, quantified evaluation of businesses; and third, and possibly the most damaging of all, a start-and-stop approach to the market characterised by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline).
Take a look at some of Buffet’s own recent investments. In the autumn of 2008, $5bn (£3.2bn) went into Goldman Sachs at a time when nobody else would touch the banks. Now that investment looks like a very shrewd move that will ultimately make the Sage of Omaha a lot of money.
Then, last November, £34bn was used to purchase Burlington Northern, America’s second largest railroad, in what amounted to a massive bet on the recovery of country’s economy.
Both of these investments are long-term moves that were entered into at a time when they offered excellent value. It is not about dipping in and out of the market on the back of changing everyday whims, but about picking out a well-considered investment and seeing it through.
Investors, Buffet often says, should remember that excitement and emotions are their enemies.
As an example, investors might want to consider the performance of the M&G Recovery Fund, which celebrated its 40th birthday in May of last year.
During its life, it has seen: a 75% fall in the UK stock market during the oil crisis of 1974; a 10-year period from 1975 when inflation averaged 15% a year; the crash of 1987 when the market fell 25% in a few days; the UK’s removal from the exchange rate mechanism in 1992, which led to a 25% devaluation in sterling overnight; the bursting of the technology bubble in 2000, quickly followed by 9/11 and the virtual total collapse of the UK banking system in 2008.
And just how has it fared? The figures speak for themselves and on an annualised basis the fund has given a yearly return of 15.7% over that 40-year period.
To put this into context, £1,000 invested in a building society in 1969 would now be worth £10,000; invested in the FTSE, it would be worth £57,000; invested in the M&G Recovery Fund it would be worth £314,000.
This clearly illustrates that, even with short-term disasters, riding out market peaks and troughs and not trying to guess market movements is still the sensible – and profitable – option.
Once investors have identified good-value opportunities, sitting tight may be difficult in an ever-changing world, but it is normally rewarded. To paraphrase Rudyard Kipling, it really is all about keeping your head while those around you are losing theirs.
Article courtesy of Pensions Management
30 March 2010
