Amen of the Week
“We create restaurant owners, not waiters… If you’re a restaurant owner, and a new restaurant opens across the street serving the same food, how do you feel? You feel like someone is putting your livelihood at risk, threatening you, threatening your family. It’s personal because the restaurant is your dream. But if you are a waiter, and a new restaurant opens across the street, how do you feel? At best, indifferent. Actually, there’s now competition for your services. Many companies inadvertently create waiters. We work tirelessly to create restaurant owners.”
– An unnamed AB InBev manager
(The Founder’s Mentality by Chris Zook & James Allen)
Do you have FOBAS?
Confused? Stocks are up post the Trump surprise. It’s totally natural to have “FOMO” – the fear of missing out. You’re likely tempted to jump on board and invest more in stocks. But you are likely frozen by “FOBAS” – the fear of being a sucker. You’d hate to invest more at today’s higher prices and lose money if investors wake up pricing stocks more pessimistically in a few months.
FOMO and FOBAS are both dangerous to our long-term wealth. The good news is that if you’re a truly long-term investor, you can free yourself from the anxiety of either affliction.
There’s no question: Stocks are expensive by historic standards (the cyclically adjusted price-earnings multiple, or CAPE, is over 27x today, compared to a historic average of ~16x). This matters. What you pay for something today determines what return you will earn on the investment. The following shows this has indeed been the case with stocks:
So price matters. But so does your time horizon. The longer your holding period, the less important price paid becomes. In other words, the longer your time horizon, the lower your odds of a big mistake (as well as being tortured by FOMO or FOBAS).
Consider the following hypothetical stock: If its Price/Earnings multiple declines from 20x to 15x next year, your downside is 19%. If, however, you held the stock for 10 years, your total return would have been 74% (or ~6% annualized). And if you held it for 25 years, your return would have been 517% (or ~8% annualized).
The key is your time horizon. If it is long enough, owning shares of a diversified portfolio of good businesses is your best defense – and offense. It’s win-win. But you’ll need the right temperament too. Do you have a strong enough stomach to hold through the inevitable and unpredictable ups and downs? If the market’s multiple returns toward its historic average, stock prices could decline by 20% in the near term – or worse. But that’s the near-term. The good news is that the longer-term your horizon, the higher the odds of your being right … and preserving your hard-earned wealth against the theft of inflation.
This is not to suggest that you should be cavalier and insensitive to the price paid. If you draw income from your portfolio, this is ESPECIALLY important. A retiree’s long-term financial health can be devastated by short-term market declines if they’re too heavy in stocks and/or long-term bonds. (See my note on Sequence of Return Risk.)
It’s all about balance. Would you like some help thinking about your own optimal balance? Give yourself the gift of Peace of Mind and reach out.
Happy Holidays from the Field!
Frank Byrd, CFA
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