Back To The Wall
My previous newsletter kicked off the tour of our office wall which features quotations that I find helpful in various ways. We last heard from Peter Lynch, legendary manager of the Fidelity Magellan Fund. Next up is the current manager of Berkshire-Hathaway’s investment portfolio, Warren Buffett.
His contribution to our wall is “Investing is simple, but not easy”. Investing always comes down to having to decide between one of three options: Buy, Hold or Sell. That seems very simple but, as he suggests, deciding which of the three choices to make can be anything but easy. Those who say individuals should stick to index investing beg the question of which index to choose. Those who say that momentum is the key must remain wary of the day the music stops and there are no seats left. Those who say that bonds are the only safe investment might do well to consider the likelihood of almost three decades of rising bond values continuing indefinitely. As Mr. Buffett said a couple of years ago: “Bonds should come with a warning label”.
I shared the next wall quote from contemporary French wine lover and journalist Jean-Paul Kauffman in an article a few years ago titled Often Dismal, Rarely Science: “The economy depends about as much as on economists as the weather depends on forecasters”. That article was generally critical of high-profile economists. I tried to make the point that, despite economists pretentions about the scientific nature of their work, they generally have a poor record of forecasting the market’s response to specific economic events. While economic factors underlie all investment decisions, at Warren Ward Associates we generally lean on practical and easily definable data points when choosing investments for our clients.
The lengthiest comment in the collection comes from now retired investment manager Ralph Wanger. “Deciding on an investment philosophy is kind of like picking a spouse. Do you want someone who is volatile and romantic and emotional, or do you want someone who is steady and trustworthy and down to earth. If you want a successful investment career, you'd better bind yourself to a style you can live with.” Wanger was an active small and mid-cap manager, famous (at least among professional investors) for his successful management of the Acorn Fund from 1977 through 2003. His personal style tended more toward the volatile side, always focusing on making huge returns on a few stocks instead of accepting smaller returns on a group of stocks. For those of you who might be wondering, the WWA approach is much more along the steady and down to earth axis.
As I mentioned, economists have yet to decode all the secrets of the market. One issue that’s long been debated is how wealth is actually created. Broadly, does it come from labor or capital? It’s my own belief that it comes from capital formation: those who invest in starting a business have the opportunity to achieve great wealth. Of course, not all investments turn out successfully. Former astronaut and CEO of Eastern Airlines Frank Borman provides a counterpoint in our next bit of wall wisdom: “Capitalism without bankruptcy is like Christianity without hell.” Since Robert Heinlein pointed out many years ago that “There’s no such thing as a free lunch”, this makes intuitive sense to me. Investing may bring wealth – the Walton family is still the wealthiest in the country – but it can also bring the opposite. In May of 2015, Forbes magazine reported that rapper 50 Cent, with investments in precious metals and vitamin water, was worth $155 million. Last week he filed for bankruptcy protection.
I must apologize for continuing to pick on economists but our next quote does tend to reinforce some of my earlier sentiments: “If the nation's economists were laid end to end, they would point in all directions.” It’s provided by Arthur Motley, a onetime Fuller brush salesman who rose to become the publisher of Parade Magazine and later, President of the US Chamber of Commerce. He was an extremely practical businessman who always maintained that “nothing happens until somebody sells something”. He had little use for theoreticians who were removed from the day-to-day activities of life and spent his own business career focused on getting things done and helping others improve their lives.
Because of its importance in our every day work, this final quote could easily have been first: “People should be more concerned with the return of their principal than the return on their principal.” It was provided by Yale and Oxford educated Jim Rogers, a successful money manager and writer who has published books about topics as diverse as commodity investing and travel by motorcycle. His investment approach generally involved strategies which were out of favor at the time he employed them. We are, of course, financial planners but investments are part of almost every financial plan. When considering various investments for our clients, the first question we ask is: “Who will buy this from us when we’re ready to sell?” If there’s no obvious answer to the question, we go no further. It’s one thing to try to earn more on your investments, say by buying a lower-rated bond in place of a treasury bond. It’s another thing entirely to buy a bond which might not be repaid at maturity. Those who invested with Bernie Madoff would have certainly benefited from Rogers’ quotation.
So, that brings our virtual tour to a close. If you’re interested in seeing the real thing or just want to talk about financial planning, please stop by the office for a personalized tour.