Making investing enjoyable, understandable and profitable… A Simple and Obvious Approach

Making investing enjoyable, understandable and profitable…

Is it not true, that the really big fortunes from common stocks have been garnered by those 

• who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

Will You, Won't You? Staying out of the markets is a costly way of reducing investor anxiety.

For some investors the idea of getting involved in the markets at all is uncomfortable.  This investor anxiety is quite common in those people who get the emotional comfort they need by avoiding investing altogether.  Yet being too hesitant has large hidden costs.

What if...?

Certain people have greater natural reluctance than others to enter markets in the first place.  We call this low Market Engagement, which measures the degree to which you are inclined to avoid or engage in financial markets, usually due to a fear of the unknown or getting the timing wrong.  It is a component of risk attitude and is one of the financial personality dimensions one need to understand.

Low Market Engagement can mean you are nervous of investing at the wrong time so you tend to stay out of the markets which is a costly way of reducing anxiety.  To overcome this you may opt to invest in a gradual, phased manner, normally starting with the lower risk asset classes.  Low Market Engagement investors may also value some protection against large interim capital losses for products in riskier asset classes.

Those with high Market Engagement can find it easier to commit to investments.  However this can sometimes lead to damaging enthusiasm where investors appear "trigger happy" with investments, giving them less consideration than is due.  Investors are also more likely to invest based on passing recommendations from people they meet.


Ref:
Barclays
Wealth and Investment Management.

Are you too scared to invest? You might have missed out on huge gains and put your financial futures in jeopardy.

5 Reasons Most Investors Fail

By Sean Williams 
September 8, 2013 |

I've been actively investing money into the market now for the past 15 years. Over that time I've morphed through a number of investing styles -- day-trading, trading based on technical analysis, long-term investing, and in the late 1990s even throwing darts. If I've learned anything over these years, it's that investing in businesses and ideas, not a stock ticker, is where the big gains are to be had.

Source: Ryan Lawler, Wikimedia Commons.

So you can imagine how quickly my jaw dropped to the floor when I revisited a study conducted by Prudential Financial in June 2011 that surveyed 1,000 people and asked them two simple questions: Do you still believe in investing, or have you lost faith in the stock market; and when are you likely to put more money into the stock market (within a year, over a year from now, or never). The answers to these questions are an absolute head-banger! 

What is your current perception of the stock market?

There are still benefits to investing	42%
I've lost faith in the market	58%

Source: Prudential Financial.

When are you likely to put more money into the stock market?

Within a year	25%
Over a year from now	31%
Never	44%

Source: Prudential Financial.

Now keep in mind that when these respondents were surveyed, the stock market had already rebounded a full 100% from its lows! Based on these figures, a full 44% of respondents would have missed out on an additional 26% rally in the broad-based S&P 500 (SNPINDEX: ^GSPC  ) which is higher than the historical annual average return of the stock market. Based on the exact date of June 1, 2011, to June 1, 2012, the 31% who chose to wait a year and try to time the market would have come out slightly ahead -- but if you moved that date forward or backward by just a few days they, too, would have lost out.

Here are five reasons I've learned throughout my years of investing why most investors fail:

• They're trying to buy stocks, not businesses.
• They don't understand the concept of compounding gains.
• They don't feel they have enough money to begin investing.
• They're too scared to lose their money.
• They don't know how to get started.

And here are some of the ways you can overcome these flaws.

Buy businesses, not stocksAt The Motley Fool you'll hear us trumpet Warren Buffett, the CEO of Berkshire Hathaway(NYSE: BRK-A  ) (NYSE: BRK-B  ) a lot -- but with good reason. Warren Buffett invests with the mentality that he's buying into a company that he thinks would succeed if the stock market shut down for the next 10 years. He believes in the management team of every company he buys and focuses on buying businesses with brand and pricing power. You might refer to them as boring investments, but Buffett just sees these businesses as steady sources of cash flow that will increase shareholder value in almost any economic environment.

Therefore, it shouldn't come as a surprise that his holding company, Berkshire Hathaway, which just recently announced the purchase of its 58th subsidiary in NV Energy in May, has outpaced the S&P 500 in 39 of the past 48 years. That's not luck -- that's what happens when you invest in businesses instead of trading stocks.

Invest for the long term and let compounding gains work in your favorThe most abundant mistake often made is when investors attempt to become traders and time the market. While timing the market may work for a short period, it's been shown time and again that long-term compounding gains achieved through share price appreciation and dividends will outpace the nominal gains achieved through day-trading and short-term holds. According to ABC News, and as I noted last month, of the nominal gains achieved by the S&P 500 between 1910 to 2010, dividend yield and dividend growth comprised 90% of all gains.

The Fool's Brian Stoffel put this story in an even easier-to-understand context in February 2012, when, in his fictitious short story he undertook explaining how short-minded investors would have missed out on big gains in Coca-Cola (NYSE: KO  ) versus long-term investors. Had a short-term investor sold holdings after 10 years in Brian's story, he or she may have netted a 2,500% gain, but were the same investor to hold from 1920 through the present day, that person would be up well over 1,000,000%, inclusive of dividends and share price appreciation!

There is no such thing as a wrong amount to invest withOne of the more superfluous rumors that's been floating around for decades is that it's not worth investing in the stock market if you don't have enough money to get started. This is blatantly wrong! If you have $200,000 or $200, it's always in your best interests to put that money to work for you.

Last week, the Fool's macroeconomic guru, Morgan Housel, demonstrated this point to a "T" when he examined the effect of wealth building over time. According to his calculations, a person in his or her 20s could see each dollar saved and invested turn into $10-$18 in future value. Even if that only means $20 per week, that's possibly $200-$360 in future value based on the standard historical returns of the market! 

Source: Rafael Matsunaga, Flickr.

You have to invest to beat inflationPutting your money under the mattress might preserve your nominal money, but it won't help you over the long run as prices continue to rise and make what money you currently have less valuable. Anyone who hopes to stay ahead of the game needs to invest.

Keep in mind that there are multiple ways of beating inflation and retiring well without risking your entire nest egg. It's perfectly fine to be risk-averse, which is what investment-grade and government-issued bonds are for. However, other ways of investing safely do exist, including buying into basket ETFs that spread your assets, along with the assets of others, among a number of companies. One great idea here would the iShares MSCI USA Minimum Volatility ETF (NYSEMKT: USMV  ) . Composed of 134 large-cap, low-volatility names such as PepsiCo., Johnson & Johnson, and TJ Maxx parent TJX, the iShares Minimum Volatility ETF bears just a 0.15% annual expense, yields slightly better than 2% annually, and is only 78% as volatile as the S&P 500.

Getting started is easier than everOne of the often forgotten reasons investors fail is that many are simply too overwhelmed or worried about their lack of knowledge to even get started. Luckily for you, the Internet has made the ability to learn about the market and individual companies easier than it's ever been.

The Motley Fool's co-founders (and brothers), David and Tom Gardner, developed the 13 Steps to Investing Foolishly specifically with that skittish investor in mind who's always been curious about investing in the stock market but has been terrified of his or her lack of knowledge or been wary of how to get a foot in the door. My suggestion is, if you're one of the 44% who exclaimed they'd never invest in the market again, one of the 58% who's lost faith in the market, or one of the many on the outside looking in, read over and implement these 13 steps.

Obviously you aren't going to be right with every investment, but all it takes is a few big winners and a lot of time for you to be sitting pretty in an early retirement.

Put plainly, if you don't take the time to invest, you could wind up like the millions of Americans that have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest, that have missed out on huge gains and put their financial futures in jeopardy. 

http://www.fool.com/investing/general/2013/09/08/5-reasons-most-investors-fail.aspx

Philip Fisher: Why staying long-term in your investments makes a lot of sense.

Why staying long-term makes a lot of sense?    


Quoting Phillip Fisher:

1.  It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow.  2.  It's a small-win proposition. 3.  If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater. 

1.  Someone made a remark that, while it is factually correct, is completely unrealistic when he said, "Nobody ever went broke taking a profit."   2.  Well, it is true that you don't go broke taking a profit, but that ASSUMES you will make a profit on EVERYTHING you do.  3.  It doesn't allow for the mistakes you're bound to make in the investment business.

1.  Funny thing is, I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favourite stocks.  2.  Then when their stock got up to a higher price, the pressure to sell got so strong.  3.  "Well, why don't we sell half of it, so as to get our bait back?"  4.  That is a totally ridiculous argument.  5.  Either this is a better investment than another one or a worse one.  6.  Getting your bait back is just a question of psychological comfort.  7.  It doesn't have anything to do with whether it is the right move or not. 

The importance of understanding your own behaviours in relation to your actions in investing; once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.

The  person capable of standing back may notice that change is the one constant.  

One might do well to stand back and consider whether a perceived truth is indeed so, or whether in fact the more things apparently change, the more some things do indeed remain the same.

Following the crowd and abandoning a commitment to a long-term approach in a business you bought into believing it to be sound could lead to a real loss, especially if, six months later, it turns out that the crowd consisted of ill-informed speculating lemmings and now the shares you sold have doubled in value as sanity returned to the market.

The importance of understanding your own behaviours in relation to your actions cannot be over-stated. 

Once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.  Something which is easier said than done.  

"An optimist will tell you the glass is half-full;
the pessimist, half-empty; and
the engineer will tell you the glass is twice the size it needs to be."

"Money makes Money". Money can snowball.

You have an investment which you are now also getting a dividend yield of at least 7%, paid in regular instalments.  What do you do with the money after your tax has been paid?

What you don't do is withdraw it from your account and spend it.  You could do that, but that would be stupid because you can use dividend payments over time to start to accrue your wealth.  Over time, this can create a snowball effect as your wealth compounds.  Imagine getting to the point at which your dividend payments alone are becoming enough to make it worthwhile re-investing them alone, aside from anything you can top it up with yourself.

When you get to that stage, you will be on the verge of creating a self-sustaining money machine.  It is what is meant by the old phrase "money makes money".  In fact, it does.

Getting your money to work for you is indeed possible if you adopt some of the core principles of investing and apply them consistently and patiently over time.  The more time, the more money will compound. 

WHY NOT have a 100-year plan that would ensure that your children and grandchildren grow into very wealth people indeed.  Investing is a relay marathon, not a sprint. 

Warren Buffett - The Long Term Investor

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."  Warren Buffett

Patience and pricing are once again your main allies.

Warren Buffett bought into Coca Cola when its share price was at one of its lowest points, well below the average, and still holds the stock to this day.

Invest like Buffett - Hold on to your Winners Forever

Best holding period is holding forever.
Sell your losers, hold on to your winners.

SELL THE LOSERS, LET THE WINNERS RUN.
Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

< I suggest this video: http://www.youtube.com/watch?v=WVqyCRYBieI >
Newbie
on 4/7/13

Thanks to Newbie for highlighting this video to me.

Buffett believes it is foolish to use short-term prices to judge a company's success. What happens to the stock price in the short run is inconsequential.

If adapting Buffett's investment strategy required only a change in perspective, then probably more investors would become proponents.  Unfortunately, applying Buffett's approach requires changing not only perspective but also changing how performance is evaluated and communicated.

The traditional yardstick for measuring performance is price change:  the difference between the purchase price of the stock and the market price of the stock.  In the long run, the price of a stock should approximate the change in value of the business.  However, in the short run, prices can gyrate widely above and below a company's value, dependent on factors other than the progress of the business.  The problem remains that most investors use short-term changes to gauge the success or failure of their investment approach.  However, these short-term price changes often have little to do with the changing economic value of the business and much to do with anticipating the behaviour of other investors.

Buffett believes it is foolish to use short-term prices to judge a company's success.  Instead, he lets his companies report their value to him, by their economic progress.  Once a year, he checks several variables:

• Return on beginning shareholder's equity
• Change in operating margins, debt levels, and capital expenditure needs.
• The company's cash generating ability.

If these economic measurements are improving, he knows the share price, over the long term, should reflect this.  What happens to the stock price in the short run is inconsequential.

The difficulty of using economic measurements as yardsticks for success is that communicating performance in this manner is not customary.  Clients and investment professionals alike are programmed to follow prices.  The stock market reports price change daily.  The client's account statement reflects price change monthly and the investment professional, using price change, is measured quarterly. 

The answer to this dilemma may lie in employing Buffett's concept of "look-through" earnings.  If investor use look-through earnings to evaluate their portfolio's performance, perhaps the irrational behaviour of solely chasing price might be tempered.

You are not compelled to sell just because of short-term appreciation. Fisher taught either the investment you hold is a better investment than cash or it is not.

Sometimes the market will quickly confirm Buffett's judgement that a company is a good investment.  When that happens, he is not compelled to sell just because of short-term appreciation.  

He considers the Wall Street maxim "you never go broke taking a profit" to be foolish advice.

Fisher taught him that either the investment you hold is a better investment than cash or it is not.  

Buffett says that he is "quite content to hold any security indefinitely, so long as 

• the prospective return on equity capital (ROE) of the underlying business is satisfactory, 
• management is competent and honest, and 
• the market does not overvalue the business. 

If the stock market does significantly overvalue a business, he will sell.

In addition, Buffett will sell a fairly valued or undervalued security if he needs the proceeds to purchase something else - either

• a business that is even more undervalued or 
• one of equal value that he understands better.  

Beyond this investment strategy, however, Buffett confessed in 1987 that there are three common-stock positions that he will not sell, regardless of how seriously the stock market may overvalue their shares:  The Washing Post Company, GEICO Corporation, and Capital Cities/ABC.  In 1990, he added The Coca-Cola Company to this list of permanent common-stock holdings.

This 'till-death-do-us-part attitude places these four investments on the same commitment level as Berkshire's controlled businesses.  Permanent status is not something Buffett hands out indiscriminately.  And it should be noted that a company is not automatically "permanent" on the day Buffett buys it.  Berkshire Hathaway has owned shares of The Washington Post Company for 20 years and GEICO for 18 years.  Buffett first purchased Capital Cities in 1977.  Even Coca-Cola, first purchased in 1988, was not elevated to permanent status until 1990.

As long as businesses are increasing shareholder value at a satisfactory rate, a long term investor would prefer that the stock market delay its recognition.

It is Warren Buffett's practice to let companies inform him by their operating results, not by their short-term stock quotes, whether Berkshire's investments are successful.

He is convinced that although the stock market, in the short run, may ignore a business's financial results, it will, over time, confirm a company's success or failure at providing increased shareholder value.

Buffett remembers Ben Graham telling him that "in the short run, the market is a voting machine but inn the long run it is a weighting machine."

He is willing to be patient.  In fact, as long as Berkshire's businesses are increasing shareholder value at a satisfactory rate, he would prefer that the stock market delay its recognition, thereby allowing him the opportunity to purchase more shares at bargain prices.  

Morgan Stanley’s Best Stocks for Long-Term Growth

Laura Joszt

Published: Monday, October 1st 2012

Although stock picking is incredibly inaccurate and often wrong, that doesn’t stop analysts from predicting which stocks they think will do the best. Given the state of the world, Morgan Stanley has come up with its list of stocks that do well no matter how the economy is doing.

Europe is still fighting off a debt crisis, China’s economy is finally slowing down and the U.S. is facing a scary fiscal cliff at the end of 2012 (in addition to the end of the world?). Plus, investors seem to be scared of stocks again. And the truth is no one can really predict where the economies of the world are going — although they will try their hardest to come up with accurate indicators.

Business Insider has posted the 42 stocks on Morgan Stanley’s list that should help investors in this uncertain environment. These companies benefit from strong long-term growth prospects, so don’t expect to make a quick buck and get out like other stocks.

Here are the companies on the list with the highest earnings per share (EPS) growth.

Note: The EPS growth is the projected compound annual growth rate (CAGR) from 2011 to 2014; the P/E estimates are based on 2012 EPS expectations; and the PEG ratio refers to the price earnings to growth ratio, which is an indicator of the stock's valuation.

Stock information and estimates are from Morgan Stanley.

10. Lululemon Athletica

Ticker: LULU
EPS growth: 29.9%
P/E 2012: 40.0
PEG ratio: 1.3

9. American Tower

Ticker: AMT
EPS growth: 34.3%
P/E 2012: 50.1
PEG ratio: 1.5

8. Apple

Ticker: AAPL
EPS growth: 34.4%
P/E 2012: 15.4
PEG ratio: 0.4

7. Under Armour

Ticker: UA
EPS growth: 34.5%
P/E 2012: 45.1
PEG ratio: 1.3

6. Rackspace Hosting Inc.

Ticker: RAX
EPS growth: 35.3%
P/E 2012: 87.0
PEG ratio: 2.5

5. Michael Kors Holdings

Ticker: KORS
EPS growth: 40.0%
P/E 2012: 37.2
PEG ratio: 0.9

4. (tie) Fusion-io

Ticker: FIO
EPS growth: 43.8%
P/E 2012: 83.6
PEG ratio: 1.9

4. (tie) Amazon

Ticker: AMZN
EPS growth: 43.8%
P/E 2012: 327.9
PEG ratio: 7.5

2. Crown Castle

Ticker: CCI
EPS growth: 50.1%
P/E 2012: 67.6
PEG ratio: 1.3

1. Linkedin Corp

Ticker: LNKD
EPS growth: 89.9%
P/E 2012: 214.1
PEG ratio: 2.4

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock.

Read more:
Morgan Stanley: These 42 Stocks are Winners No Matter What Happens in the Economy – Business Insider

The Second Secret of Small-Cap Investing: Invest for the Long Term (but Monitor in the Short Term)

Successful stock investors know that a long-term approach often pays off by allowing individuals to ride out a company’s temporary setbacks and realize gains over a period of five years or a decade or even longer. In addition, minimizing transaction costs and short-term capital gains taxes can add to the overall rates of return.

With small-cap stocks, however, some tweaking to the buy-and-hold strategy used in a large-cap stock portfolio may be necessary. Because smaller companies are less established, there is often a higher degree of risk and volatility involved in holding these kinds of stocks. That’s not to say that a buy-and-hold approach can’t work, though, but just a reminder that “buy and hold” does not mean “buy and forget.” With small-cap stocks it can be prudent to maintain a somewhat higher level of vigilance on their activities, watching for signs of trouble and selling promptly when real problems affect a company.

When problems do arise, the market is often less forgiving of small companies when they hit roadblocks. Even when management eventually steers these companies back in the right direction,investors may stay away until they are receive excessive degrees of reassurance, keeping stock prices depressed all the while.

It’s never good to be swayed into action by irrational market moves, however, and patience is frequently required to become a successful stock investor. Smaller companies often don’t have the broad institutional interest required to support share price growth. As a result, stock prices may only grow moderately until a tipping point is reached, at which the market seems to wakes up to the potential of a company. Investors who have already discovered the stock will then be nicely rewarded.

http://blog.betterinvesting.org/investing/five-secrets-of-small-cap-investing-part-two/

7 Compelling Reasons Why Long Term Investing Is Better Than Short Term Trading

by Silicon Valley Blogger on 2008-05-12  

The case against short term trading.

Over the years, I’ve learned to gravitate towards long term investing as I gained more education and experience with investing. This is the strategy that involves building a diversified portfolio and following an asset allocation that is in tune with your risk tolerance. It involves a commitment to keeping a portfolio invested in the markets, regardless of market behavior. Like many finance enthusiasts out there, this is my preferred manner of investing, and here’s why:

7 Reasons To Invest For The Long Term

#1 It’s easy enough for anyone to do.

#2 The power of compounding is your friend.

#3 Passive investments are convenient.

#4 By staying invested, you avoid making costly mistakes.

#5 A long term view lowers your risk.

#6 A long term view gives you time to fix your investment mistakes.

#7 Your rate of return is boosted by stock dividends.

Read more here: http://www.thedigeratilife.com/blog/index.php/2008/05/12/7-compelling-reasons-why-long-term-investing-is-better-than-short-term-trading/


Range of S&P 500 returns, 1926-2005

To reach large sums, you only need to save smaller amounts early on.

For selected good quality growth/value stocks, over a 10 years investing horizon, the upside reward/downside risk 
= 100% upside gains / 0% downside loss.    
   

Don't panic more than you have to. Look at the return over years rather than days.

Don't panic more than you have to.  Decide measurable standards for what events are a concern, a worry and a big problem, and what you'll do when they happen.

If the value of your pension drops in a stock-market dip, for example, the best advice is often to do nothing, wait for a recovery and look at the return over years rather than days.

Make sure the majority of your portfolio is geared to offering long-term returns.

When you are investing, by all means look at the daily price shifts for entertainment and mild speculation, but make sure the majority of your portfolio is geared to offering long-term returns.  Over ten or twenty years of conservative investment is far more attractive than a meteoric stock.

Your mental focus is: on YOUR INVESTMENT PROCESS

The Master Investor treats investing like a business: he doesn't focus on any single investment but on the overall outcome of the continual application of the same investment system over and over and over again.  He establishes procedures and systems so that he can compound his returns on a long-term basis.  And that's where his mental focus is:  on his investment process.  

Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.


Bottom line:  Focus on your investment process  to compound your returns on a long-term basis

Investor time horizons are increasingly measured in nanoseconds. However, long-term investing makes sense.

Warren Buffett is all the proof John Kay needs that long-term investing makes sense 

The Kay review identifies the problem, but tackling corporate and investor "hyperactivity" needs a cultural revolution.

Billionaire investor Warren Buffett Photo: AP

By Alistair Osborne, Business Editor

7:36PM BST 23 Jul 2012

8 Comments

John Kay must be an optimist.

He’s just produced a 113-page report into short-termism in UK equity markets. Who does he think’s got the concentration span to read that? Three pages would be a stretch for most of the people it’s aimed at. And that’s allowing for page 2 being intentionally blank – like the mind of any top City trader.

Luckily, you don’t have to delve too far into Kay’s critique of “hyperactive” companies and investors all seeking “immediate gratification” to spot that the economist has done an OK job of identifying the problem. Whether his recommendations will ever fix it is another thing entirely. Even Kay admits he can only offer “long-term solutions”, which sounds kind of circular.

For him, the blame for the current knee-jerk investment environment is shared pretty equally between companies and shareholders.

UK-listed companies continually lag their peers in Germany, America and France when it comes to traditional benchmarks of long-term thinking, such as business investment or R&D spend.

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And it’s not hard to see why when companies are run by bosses caught awkwardly between their next bonus or a pay-off, with the average tenure of a FTSE-100 chief executive less than five years. No wonder they tend to go for the supposed quick fixes of internal shake-ups, financial engineering or M&A rather than making decisions that might reward their successor. They do that too, as Kay shows, despite nasty history lessons from the likes of GEC, ICI and Royal Bank of Scotland.

Meanwhile, investor time horizons are increasingly measured in nanoseconds – and not only those of high-frequency traders otherwise known as computers. Quarterly targets and the bonuses that ride on them have made fund managers increasingly twitchy, while the distance between the company and the saver who wants to invest in it has been lengthened by a costly chain of middle-men each taking a cut, including investment consultants, independent financial advisers and pension trustees. What gets lost in the process is any real engagement between the company and its shareholders.

Kay’s solution for all this, as he admits, amounts more to cultural revolution than quick fix – a sort of everyday “shareholder spring”. Among his 17-point plan is the proposal to axe all cash bonuses for directors, replacing them with share-based awards that must be held “at least until after the executive has retired from the business”. He’d also like an end to mandatory quarterly reporting (wouldn’t we all) for both fund managers and companies.

Then there’s his proposal for a new stewardship code that goes beyond the current focus on corporate governance to push shareholders to ask hard questions on such things as strategy and capital allocation – though if they’re not doing that already, what are they getting paid for? He’s keen too on a new “investors forum”, so shareholders can club together to club the management or, as he ventured on Monday, to help sort out the Barclays board – even if that looks wishful thinking.

Sure, much of this, if ever implemented, might encourage a more long-term approach – though Kay could have saved himself some words by getting to the apotheosis of such investment earlier than page 56. It’s there he mentions the man who once declared “our favourite holding period is forever”, adding: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

As one of the richest men on the planet, Warren Buffett kind of makes Kay’s case for him.

http://www.telegraph.co.uk/finance/comment/alistair-osborne/9421860/Warren-Buffett-is-all-the-proof-John-Kay-needs-that-long-term-investing-makes-sense.html

Markets shrink: it's normal so be optimistic

July 21, 2012
Annette Sampson
Personal Finance Editor

Have we hit capitulation yet? It has been a while since we've dragged out the investor sentiment cycle, but when the head of investment strategy for AMP Capital Investors, Dr Shane Oliver, included it in his latest newsletter, it seemed time for another look.

Markets are only partly driven by fundamental considerations such as value and dividend yields.

Their real impetus comes from emotions such as fear and greed.

And while those emotions can seem erratic over the short term, in the longer term, investor psychology is highly predictable.

As the graph shows, investors go through a roller-coaster of emotions in the typical market cycle.

Rising share prices spark a sense of optimism, which fast accelerates into excitement and the thrill of watching investments grow.

The top of any boom is characterised by euphoria when we think nothing can go wrong. This is the boom that will go on forever, and while we'd be smart to run for the doors when people start talking about ''new paradigms'' and how ''this time it's different'', most of us don't want to know. We've become overconfident, believing that our success is due to our own skill, not the fact that any idiot can make money in a raging bull market. And greed has well and truly kicked in, promoting us to chase more.

Rationally, this is the most dangerous point in the investment cycle. Prices become overvalued and the average investor is blind to the early warning signs. But no one wants to know.

When the market does inevitably take a turn for the worse, emotions spiral downwards through anxiety, denial (that's where the ''I'm a long-term investor, I don't need to worry'' bit is strongest), and, eventually, fear, depression and panic.

But it's not until investors give up hope that the cycle moves back into an upswing.

The bottom of any market cycle is characterised by capitulation and despondency. Just as investors believed the bull market could go on forever at the top of the cycle, they start to believe the bad times are here to stay. That's when you start to hear people talking about getting out of the sharemarket. Permanently. Because no matter what the pundits say, things aren't going to change. And just as the most dangerous time to invest is when markets are euphoric, the best investment opportunities arise when they are despondent.

In the 1970s, the long bear market led to pronouncements that equities were dead. Oliver reckons that is where we are again now.

The only problem is that while the psychology remains the same, no two market cycles are identical. And while you can be guaranteed that we will eventually move back to hope and optimism, there are no guarantees on how long it will take.

After an initial period of denial following the global financial crisis, markets have now woken up to the fact that Europe, and indeed most Western economies, will only truly recover when they have their debt under control. That will be a long and painful process.

Preserving capital makes sense when ongoing volatility is a high probability. As the investment director at Fidelity Worldwide Investment, Tom Stevenson, recently pointed out, if you lose a third of your money, you have to grow what you have left by 50 per cent to get back to where you started.

The fact that the big stocks are now highly correlated has also made short-term stock-picking profits hard to come by. The good gets trashed along with the bad.

But as Stevenson says, there are still excellent businesses out there with fantastic prospects. While shares in those companies won't bounce back immediately, he says in 10 years you might well look back and think this was a good time to invest in these long-term winners.

Oliver argues this period of poor returns isn't new; it's just something that markets do.

And as such, giving in to despondency can mean missing out on opportunities. Yes, there are plenty of reasons to be cautious, but he says it would be dangerous to write off equities altogether.

This story was found at: http://www.theage.com.au/money/markets-shrink-its-normal-so-be-optimistic-20120720-22f3l.html