February 23, 2009


This past week I read a great article put forth by Davis Advisors. Although I will only share snippets from the article, the entire article is available at their website. The article shares wisdom from some of the greatest investors of the past century (Warren Buffett, Benjamin Graham, Peter Lynch...). It is a worthwhile, thought-provoking read.

Avoid Self-Destructive Investor Behavior.
Emotions tend to wreak havoc on investment returns (particularly in challenging times like these). Check out the following chart ...

It is mind boggling to see the impact that emotions (namely fear and greed) play in investor returns - market timing, abandoning one's investment plan, chasing the 'new' or 'hot' thing [at the wrong time] can truly cripple one's financial game plan.

Understand that Crises are Inevitable.
Stock investors throughout history have always encountered crises and uncertainty, yet the market has continued to grow over the long term.
-- 1970s - Stagflation, rising energy, market decline of 44% in 2 years.
-- 1980s - Black Monday (22% market decline in one day).
-- 1990s - Savings & loan crisis, Asian financial crises.
-- 2000s - Bursting of tech bubble, 9/11, credit/real estate crisis.

In spite of challenges, the market has shown itself to be resilient; the long-term stock market trend has always been positive. Keeping this in mind may keep you from overreacting emotionally to market events and uncertainty.

Be Patient.
Patience is one of the most common attributes among great investors. Investing shouldn't be viewed as a short-term prospect ... Between 1928 and 2007, stocks returned positive returns in 59 of 80 one year periods (74% of the time). When looking at longer periods of time (5 years - see chart below), stocks delivered positive returns 93% of the time (71 out of 76 five year periods). Historically, stocks have rewarded patient, long-term investors.

Disregard Short-Term Forecasts and Predictions.
During challenging times, the media often becomes a focal point of attention. There is nothing wrong with watching CNBC or other financial programs or prognosticators (I'm guilty too). What does history teach us? Don't waste your time and energy focusing on things that are unpredictable and uncontrollable (i.e., When is the market going to bottom?). Instead, focus attention on things you can control - your asset allocation, evaluating your tolerance for risk, etc. The chart below is a clear example of just how difficult forecasting the future is even for "the pros" (who got it wrong about 2 times out of 3 in this example).
The results tracked the average interest rate forecast from the Wall Street Journal Survey of Economists from December 1982 - June 2008 compared to what interest rates actually did ...

The past year has been difficult for ALL investors. Avoid compounding the problem by making emotional/irrational investment decisions.