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Long-term investing still works in moody markets Letter to Berkshire Hathaway Shareholders
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One of the most sought-after publications in the investment world every year is the “Letter to Shareholders” of Berkshire Hathaway, the investment holding company managed by Warren Buffett, who is one of the richest men in the world and considered to be the world’s greatest investment mind.
Berkshire’s annual percentage change in per-share book value from 1965 to 2007 was 21.1 percent versus 10.3 percent for the S&P 500, including dividends.
Those of us who have listened to Buffett for many years cherish his writings because like a fine wine they only improve with age.
He has explained many times that his strategy is quite simple: He buys good investments and holds for the long term.
He likes to say the “best holding period is forever, the best time to sell is never.” Of course, sometimes that can be difficult, as it was after the terrible stock market decline in October 1987.
Buffett gave us permission to reprint this excerpt from his 1987 letter to shareholders, which first appeared in our March 2003 Investment Perspective newsletter.
We began that article with the words, “Three years of stock market declines have left many investors wondering whether or not they’re on the right track.”
Little did we know that same month would mark the beginning of the next bull market, which ended in October 2007.
We hope you believe, as we do, that Buffett’s advice for dealing with the emotions created by volatile markets is as valuable today as it was back then.
Don’t let moods rule
Bear markets wear investors down.
The continual stream of bad news can eventually take its toll and cause people to give up and sell out of the market.
If you own quality investments in a diversified portfolio, you need to stay the course.
The temptation to respond emotionally to big swings in the market can be the biggest challenge you face as a long-term investor.
But it’s one that you must overcome in order to reach your long-term goals.
Diversification does not guarantee a profit or protect against loss.
(Alan F. Skrainka is CFA and chief market strategist of Edward Jones)
(Belfanti, AAMS, is available for free consultation at the local Edward Jones office, 106 W. Main St., Bloomsburg. Call toll-free, 1-877-784-9001)Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.
Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times, he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up someday in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather, an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own effort to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
(Warren Buffett, Excerpt Berkshire Hathaway, Inc. Letter to Shareholders, reprinted with permission � 1987.)“An investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.” — Warren Buffett
Berkshire’s annual percentage change in per-share book value from 1965 to 2007 was 21.1 percent versus 10.3 percent for the S&P 500, including dividends.
Those of us who have listened to Buffett for many years cherish his writings because like a fine wine they only improve with age.
He has explained many times that his strategy is quite simple: He buys good investments and holds for the long term.
He likes to say the “best holding period is forever, the best time to sell is never.” Of course, sometimes that can be difficult, as it was after the terrible stock market decline in October 1987.
Buffett gave us permission to reprint this excerpt from his 1987 letter to shareholders, which first appeared in our March 2003 Investment Perspective newsletter.
We began that article with the words, “Three years of stock market declines have left many investors wondering whether or not they’re on the right track.”
Little did we know that same month would mark the beginning of the next bull market, which ended in October 2007.
We hope you believe, as we do, that Buffett’s advice for dealing with the emotions created by volatile markets is as valuable today as it was back then.
Don’t let moods rule
Bear markets wear investors down.
The continual stream of bad news can eventually take its toll and cause people to give up and sell out of the market.
If you own quality investments in a diversified portfolio, you need to stay the course.
The temptation to respond emotionally to big swings in the market can be the biggest challenge you face as a long-term investor.
But it’s one that you must overcome in order to reach your long-term goals.
Diversification does not guarantee a profit or protect against loss.
(Alan F. Skrainka is CFA and chief market strategist of Edward Jones)
(Belfanti, AAMS, is available for free consultation at the local Edward Jones office, 106 W. Main St., Bloomsburg. Call toll-free, 1-877-784-9001)Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.
Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times, he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up someday in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather, an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own effort to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
(Warren Buffett, Excerpt Berkshire Hathaway, Inc. Letter to Shareholders, reprinted with permission � 1987.)“An investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.” — Warren Buffett
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