It’s common practice for the president or CEO of a company to include a letter to shareholders in the annual report. Berkshire Hathaway’s chairman and CEO, Warren Buffett, doesn’t buck the trend.
His annual letter (http://www.berkshirehathaway.com/letters/2018ltr.pdf) captures plenty of attention, and this year was no exception. The focus is on the investments and operating performance of Berkshire Hathaway, but the Oracle of Omaha also includes many sound principles for wealth creation as well as his general thoughts about the U.S. economy.
Warren Buffett once said, “Investing is simple, but not easy.” You would think that if something were simple that it would be easy. Not so.
Take losing weight. Burn more calories than you take in. The surefire way to invest is to buy low and sell high. Both are very simple, but extremely difficult.
The Conflict
The reason these are so difficult is because our goals tend to be realized over a long period of time, while we are tempted to pursue pleasure and comfort today.
A slice of chocolate cake now sounds a lot better than forgoing that pleasure for losing a few pounds in several months. Appeasing our emotions today by “adjusting” our portfolio gives us a sense of control and instant emotional relief, but often results in a long-term cost.
Market Watching
As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”
Watching the markets and/or frequent evaluation of portfolio performance are some of the worst activities investors perform. This is because, in the short term, security returns fluctuate wildly…even though the value of the underlying companies seldom change. Think Dec 2018 and Jan 2019.
As I’ve repeatedly said, your investment plan incorporates the unexpected detours. The disciplined investor, who divorces the emotional component from the investment plan, chooses the best path to meet his or her long-term financial goals.
Be Prepared for Fluctuations
Fluctuation is a normal part of the market and should be expected, in both bull and bear markets.
Over the past 38 years, the S&P 500 has experienced intra-year losses of greater than 10% more than half the time. But don’t fret. Even in those volatile years, the S&P 500 still generated positive annual returns 68% of the time.1 If we trade based on fluctuations, we may be leaving a lot of future return on the table.
This teaches us an important lesson. We may not be able to control the amount of volatility in the markets, but we can control how much we experience. It is simply a function of how much risk we allow ourselves be exposed to in the first place. That is why, with your input, we do our best to gauge your tolerance and need for risk, before investing. When the “right-sized” risk exposure work is done on the front end, it will allow your portfolio to manage the volatility automatically. Furthermore, it gives you permission to limit how often you look, reducing the likelihood of bad emotional decisions.
1.JP Morgan, Guide to Retirement. Dec 31, 2018
Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
Best Regards,
Phil E. Gose