Sunday, July 3, 2016
Reflections on Brexit
The recent Brexit commotion has reinforced many of my investment prejudices. It has been reported that the world’s stock markets lost $3 trillion then made most of it back—all in the space of a few days. Once J.P. Morgan was asked what he expected the stock market to do over then next few years, his answer, “Fluctuate.” That is the only thing that we know for certain. We don’t know if the market will go up or down. We don’t know if individual stocks will go up or down. However, if we diversify and hope for the best, Siegel’s constant tells us that over any sufficiently long period of time we can expect a 7% return on investment after taxes and inflation. The typical thirty five to forty years of work before retirement is an example of a sufficiently long period of time. Don’t panic. The world ends every twelve years or so. Then the market will come back. Will it continue to follow this pattern forever? Who knows? I don’t, but over 200 years of data makes me hopeful. If we experience a nuclear war or a revolution, I doubt that the condition of my investments will be my first concern. In the aftermath of Brexit, one of my stocks, Hong Kong Shanghai Bank based in England took a pretty nasty hit, although it is starting to recover. However gold jumped quite nicely and my American dollars increased in value. Diversify. Diversify. Diversify. As Solomon observed, “Give portions to seven, yes, to eight because you do not know what disaster may come upon the land.” If you are a trader, you are not playing my game. I am trying to follow Richard Russell’s advice, “Don’t need the market.” Try to make decisions based on the “Prudent Man Rule.” Although this court case is based on the fiduciary nature of the trustee relationship, it is pretty sound advice for any investor. First consider your needs for the future. Then balance your desire for capital gains with your need for income. Time and dividends are your friends. If you can live without the money you have placed in a diverse selection of conservative dividend paying stocks and let the magic of compound interest work in your favor in some instances you will find that your money has doubled even if the price of the underlying shares haven’t measurably increased. Using a free Dividend ReInvestment Program (DRIP) your dividends will automatically buy more shares when the price is low and fewer shares when the price is high. All the time those new shares are generating more dividends to buy additional shares. From time to time over the course of many years, Warren Buffett has bought shares in Coca Cola, but he has never sold any of those shares. Find well managed corporations with wide moats that have a record of increasing their dividends over time or just buy shares in a low cost dividend index fund. Don’t make hasty decisions. Solomon observes, “The plans of the diligent lead to profit as surely as hast leads to poverty.” I have learned that a hasty decision to buy or sell is often a bad decision. Yes, I do lose some money by missing the tops and the bottoms, but pointing that out assumes that you can always pick the absolute top and the absolute bottom. Good luck with that assumption. In order to make diligent decisions, we need good advice and good advisors. Solomon also said, “In a multitude of counselors there is wisdom.” Consider news reports on something as trivial as a football game. If you read two reports on the same game in different newspapers, the only thing that writers might agree upon is the final score. However, if you read a half-a-dozen reports on the same game it is likely that you will get a pretty clear and balanced picture of the truth. The investment press is full of opinions, some honest, some compromised by a conflict of interest. However, if you listen carefully to this multitude of counselors you may be surprised how much wisdom you will gain. Balance. Balance and rebalance. Make certain you have balanced your equities with bonds, CDs, and cash. The Brexit dip was over before it gave me the opportunity to buy. I had made the decision to start buying after a 15% drop. I had the free cash to take advantage of such a situation. In 2008 I bought all the way down. It is very scary to lose money in the market, buy more shares, and then lose more money. However, in the end it turned out well. The last nine months of 2009 was a really good time for the market. Decide on an age appropriate balance of equities and near cash that allows you to sleep soundly on most nights. Then stick with that balance. When the market goes up, sell something. Then put the profits in bonds, a money market fund, or even an old fashioned savings account. When the market drops, start buying equities with that money you stashed away for just such an opportunity. Most investors do the opposite. They buy when the market is near its peak. Then they panic and sell when the market is near the bottom, guaranteeing they lock in their losses. I continue to believe that the market is overvalued. However, I don’t know what the actions of the Federal Reserve or the British voters might have on the future of my retirement portfolio, so I remain in the market in good times and in bad. I have found that is the best I can do.