Lest We Forget
Amen of the Week
“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray...
For the great majority of investors ... who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.”
- Warren Buffett, Investor Berkshire Hathaway 2014 Annual Report
Welcome to another bear market. Stocks go up and down. That near-term uncertainty is the price that we pay for the potential to earn higher returns over the long-term. When we suffer through these inevitable declines in our portfolio values, it’s important that we understand what we own and why we own it. Otherwise, we become vulnerable to losing confidence and selling at the wrong time.
Now might be a good time to watch the replay of our webinar, conducted earlier this week, in which we discuss “The Biggest Myth”. There is a widespread belief that the stock market goes up 10% per year over the long term (from any price level). We discuss why this is a naive assumption. We also share our conclusions on what types of stocks should be avoided as markets reach expensive levels.
Yours in the Field,
Frank Byrd, CFA
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