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Thursday, May 1st, 2008 Subscribe To Our Feed
Selwyn Gerber writes: These are the indisputable facts. The question is how we deal with them and respond within our investment portfolios. Fama’s explanation is simple: Higher returns are always the compensation for taking on risk. The stock market offers higher returns than the bond market only because it is more volatile. Likewise, the higher risk in small-cap stocks will manifest itself in rewarding the investor with higher returns. All other information about future market movements he dismisses as “noise.” As for those investors who systematically beat the market, Fama insists that they simply don’t exist. If millions of monkeys throw darts at The Wall Street Journal stock pages, at least a few of them would pick a group of winning stocks.
Our chief task as RVW investors is to ignore the noise and distraction which Wall Street dispenses regularly. Suppressing our natural instincts to follow the crowds and listen to the “experts” is our great challenge. The RVW office has no screens running, no Bloomberg terminals, and no frenetic traders. It is calm and disciplined.
There’s a pile of discarded financial bestsellers on the bookshelves like: Ravi Batra’s The Great Depression of 1990; James Glassman’s Dow 36,000; Harry Figgie’s Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of “the death of equities as a near permanent condition,” and SmartMoney’s cover story “Seven Best Mutual Funds for 1996,” whose picks went on to underperform the market by nearly 7%. In 1997, SmartMoney (a Wall Street Journal publication) found seven new best mutual fund managers. They finished 3.4 percent below the broad market index.. In 1998, the magazine’s “new best funds” came in 2.2 percent below the market. Soon after, SmartMoney ceased doing this annual survey.
“Here’s a simple, effective way to lower your anxiety: Investors who perceived the least risk were those who checked their investments no more than once a year.”
- Richard Thaler a behavioral economist at the University of Chicago.
Chapter 1: LAZINESS PAYS
Stocks provide steady, long-term gains. Investment success is a triumph of discipline over emotion and results from ignoring the short-term fluctuations in order to reap gains over time.
“The great error in Rip’s composition was an insuperable aversion to all kinds of profitable labor… In a word Rip was ready to attend to anybody’s business but his own; but as to doing family duty, and keeping his farm in order, he found it impossible.”
– Washington Irving
Rip Van Winkle is not a man unwilling to engage the world. Rather, he is a man whose very disposition is contrary to preoccupation with worldly affairs. While he is always willing to lend a hand and be in service to a friend in need, he has no concern for maximizing every opportunity to advance his own pecuniary interests. It is this quality, more than any other, which would have saved him from the mistakes made by typical investors each and every day.
In order to understand why this is true, an individual must understand the difference between long term and short term market behavior and the critical errors made by most investors that stifle returns. All too often, investors inadvertently make short-term decisions that have a significant and adverse impact on their long-term wealth.
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