A Few Simple Rules
Posted on May 3, 2024 in Investment Strategy
Investors are beginning to say things that worry me. It’s been going on for the past year but feels like it’s becoming more pervasive. Conversations are focused more and more on how investors feel about stocks and interest rates and the upcoming presidential election and Palestine and Hamas and Ukraine and Capitol Hill. All have found different reasons to be worried about a variety of things, and while some worry may be justified, the conclusion is typically, “we should own more tech stocks.” Occasionally, those who have been on the wrong side of this very concentrated rally conclude they don’t want stocks at all and are satisfied with 5% returns from money-market-like instruments.
Investment arguments that focus on feelings instead of financial facts and history lead to perdition. There are a few simple rules about buying stocks and about investing. First, an asset allocation is determined by an investor’s capacity and tolerance for risk. It usually changes as the investor ages and skews to more and more fixed income over time. This both mitigates risk and volatility and provides reliable income. Three other things matter: earnings growth, the price paid and the holding period. My wonderful partner Taylor McGowan reminds me that we do well by exploiting the inefficiency of time and Wall Street’s need for immediate gratification.
Peter Lynch said, “The most significant indicator of stock price performance is earnings growth.” Larry Kudlow said, “Earnings are the mother’s milk of stock prices.” Both are correct. The second point is what price to pay for earnings growth. Investors are willing to pay a higher price for faster earnings growth, but it is easy to be persuaded by hope for an abundant future rather than data. Finally, investment decisions that meet one’s requirements for earnings growth at reasonable prices need sufficient time to mature and blossom. The gnat-like attention span of modern markets and media pundits undermines the confidence of the less committed, especially during tumultuous news cycles.
In the long-run, disciplined investors typically make money. Frequent buying and selling and market timing have never proven effective in my experience. Determine your asset allocation, draft a plan, invest in a disciplined, dispassionate way and be patient for the rewards. A 7% compounded return will double your money in about 10 years. At 10%, your money will double in about 7 years. Stay the course. Believe in the American way and the American Dream. Emotion is the foe of the long-term investor. Feelings are best left at the door. Please call us if we can be helpful in any way.
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